>TATA MOTORS:JLR: Lower Incentives = Higher Profits (CITI)

■ Premium car discounts have declined in the US — almost 20% QoQ. The average incentives / vehicle for BMW, Mercedes and Porsche dipped to ~ $4,444 / unit in 3QFY10, indicating that discounting pressure is easing within premium cars – this augurs well for JLR, where typically ~15-20% of volumes are from the US.

■ Pre-owned car prices remain steady the UK — after a slight slippage in Oct / Nov, the average transaction price of a pre-owned car has firmed up again – indicating fairly healthy demand in the UK in the pre–owned market. We infer that pricing trends should also be stable in the new car market.

■ 3Q Results could surprise positively — Our explicit forecasts for JLR 3QFY10 factor sales of 50,000 units and EBITDA of £111m. That said, JLR has sold >56,000 units, implying upward risks to our estimates. We note that sensitivity to incentives / ASPs is also extremely high – a c£500 / vehicle reduction in incentives could result in EBITDA increasing by £25m (on a base of 50,000 units).

■ JLR Jan 10 sales at 16,269 units — imply that JLR has to achieve ~11,000 units / month over Feb / Mar to achieve our full year forecast of 174,900 units. We think this target is easily achievable, given the current run rate of ~16,000 units / month in 4Q. Seasonality is fairly high given model year changes, hence QoQ comparisons are rendered invalid.

■ New model launches -- XJ eagerly awaited — Bookings had started in London (by early Dec) for March delivery, with an expected price of around UKP55,000 for the lower end up to ~UKP90,000 for the 5L XJR.

■ Maintain Buy — We caveat that global macro risks (and the knock-on impact on consumer confidence, auto sales, et al) is the key risk in the investment thesis for Tata Motors, given that JLR accounts of ~56% of consolidated revenue, and ~50%

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