Tata Motors - New Programs to Add Zest: Edelweiss PDF link

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We believe Tata Motors (TTMT) has embarked on its next leg of growth, despite a deteriorating product mix. We deduce that JLR has enough levers for margin and free cash flow surprise (versus expectations) over FY15-17E. The factors that support our thesis include: (1) the China joint venture (JV) can be more remunerative than the existing arrangement of direct sales; (2) the new Discovery Sports (DS) volumes could easily cross previous peak levels (67K in 2007), and profitability will improve on better pricing. Empirical data indicates a spurt in volumes for a model post significant upgrade; 3) capex - R&D spend has been trending down as a % of sales since past 3 years, while recent spurt in total capex was led by pre-ponement of capacity creation. Also, the domestic commercial vehicles (CV) segment is on turnaround mode.

China: Aggressive pipeline; profitable proposition

Our analysis indicates that the Chery JV could improve its profitability depending on the extent of price cuts and level of localisation. Sharp drop in tax and cost savings from localisation are the key margin drivers. Also, China’s product pipeline remains robust with ~5 launches lined up over the next 18-24 months. An underpenetrated dealer network (versus peers) indicates significant headroom for further growth.

Commercial vehicles: Takeaways from recent meeting

Management expects sharp demand revival from Q4FY15. Being industry leader, TTMT has taken proactive measures to reduce discounts in the system. While the M&HCV demand has improved, small CV will take another 6 months to see uptick in demand. Meanwhile, focus is on profitability.

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LINK
https://www.edelweiss.in/research/Tata-Motors--New-Programs-to-Add-Zest/27170.html