Soft quarter; outlook remains strong Tata Motors’ 3QFY15http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3011198::HDFC Sec, report

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Soft quarter; outlook remains strong Tata Motors’ 3QFY15 consolidated topline (Rs 699bn, +13% YoY) was well above expectations, driven by strong ASP growth in JLR as well as India business. However, operating performance was below par with adj EBITDA margin of 15.8% (-120bps QoQ). JLR posted an 80bps QoQ drop in headline margins (18.6%) due to fx loss on hedges and impact of the Freelander run-down. However, on adjusted basis, JLR’s margins improved 40bps QoQ. Operating loss for India business adjusted for provisions came in at Rs 1.1bn (vs est -0.7bn). JLR’s new launch pipeline should drive healthy volume growth momentum for the next couple of years. Further, its platform integration benefits should start showing results over FY15-17E as we estimate its volumes/platform to double over this period. At current levels, Tata Motors trades at 14.6x/12.4x on FY16E/FY17E adjusted EPS. We maintain our Buy rating with a TP of Rs 658. Key highlights for the quarter  Mgt believes that JLR’s margins in FY16 may be lower than FY15 due to (i) below EBITDA consolidation of profits from China JV (ii) weaker model mix and launch costs for new models/engines (iii) uncertain economic conditions across markets. However, we note that mgt estimates are based on average currency rates for YTD FY15 period, which clearly suggests that there should be sizable upside based on spot fx rates.  JLR has lowered its FY15 capex + R&D at GBP 3 to 3.2bn (from ~3.5 to 3.7bn) as some amount would get spilt over to FY16. JLR mgt has pegged its capex spends for FY16 at GBP 3.6-3.8bn, translating to ~16% of sales. We believe the declining capex intensity improves FCF visibility from FY17 onwards.  Replacement demand and improvement in fleet operators’ profitability have led to an uptick in MHCV demand. TTMT has gained sizable market share in 3Q. PV volumes are gaining impetus from its new launches.

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