“Same old, same old” India negates JLR! • Tata Motors :: ICICI Securities, report

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“Same old, same old” India negates JLR! • Tata Motors’ (TML) quarterly performance was way below estimates as both JLR margins and standalone India business were disappointing at varying degrees • JLR’s margins at 18.6% were lower than estimates owing to unfavourable FX impacts and model year run outs • Lower tax rates due to reversal of provisions on account of China withholding tax aided the drop in JLR profits to ~ £593 million JLR’s strong product development cycle key to tap global markets… JLR’s strong product pipeline and investment in product development led to a strong increase in JLR’s share (~8-10%) in the global luxury car market. It will keep on improving over the next three or four years. Since Evoque’s launch, JLR’s strong performance beat on margins, profitability front was impressive with product, geography mix both driving margin growth. We feel with triggers like new product pipeline (e.g. Jag-XE, Discovery-Sport, F-Pace etc), continued investment in R&D/product development along with new manufacturing capacities in China/Brazil and the in-house “Ignenium” engines, JLR stands to witness a boost on both volumes, absolute profits as global footprint improves. Weaker than anticipated financial turnaround, all bets on CV recovery! Domestic business losses in the recent past are reflective of two problems: a) poor state of business management reflected by high other expenses (up 18% QoQ adjusted for Singur one-off vis-à-vis 4% sales jump) as things like delinquencies, inventory write-offs mount b) TML’s lack of customer mind space in the PV business has probably caused it to a operate much below peers on operating profitability metrics in order to claw back market share. However, on positive side for the M&HCV front, our expectations are of a strong bounce back (~20% in FY16E/17E) in volumes, with the same aiding profitability. However, we remain cautious on the passenger vehicle segment and do not expect the pain to go away in a hurry. We build in ~| 642 crore (inclusive of dividend income) of PAT FY17E on a positive scenario (success on both the PV side, M&HCV side). JLR valuations subdued vis-à-vis higher cash rich peers JLR’s valuations are still subdued vis-à-vis cash-rich global peers like BMW. BMW has ~25% of its market capitalisation in cash (~€15 billion FY17E consensus) while vis-à-vis JLR it is only ~14% (implied JLR market capitalisation ~£18 billion) vis-à-vis ~£2.0 billion cash & cash equivalents in FY16E. We believe peer multiples remain depressed due to high cash & low debt profile market of peers. Probably, the market could re-look JLR more in-sync with Tesla Motors rather than BMW. Tesla & JLR look increasingly comparable in terms of company life cycle, capex/sales (~9% vis-à-vis 10%) and gross profit margins (~ 36% vis-à-vis 39%) profile as both companies move towards new products, technologies. Moderate earnings growth due to India business! We remain positive on sustained earnings growth for the JLR business as the product pipeline grows and market share increases across geographies. However, the domestic business, a big drag on profitability, is unlikely to revive in a hurry. We value the stock on an SOTP basis, with JLR at 3.6x EV/EBIDTA basis contributing ~| 529/share while domestic business contributes | 16/share. Inclusive of other subsidiaries & China JV, we maintain our target price to | 600. However, with higher valuation upside in preference shares, we would recommend that our portfolio investors add Tata Motors DVR on dips with a target price of | 420.

LINK
 http://content.icicidirect.com/mailimages/IDirect_TataMotors_Q3FY15.pdf