Thursday, February 16, 2012


Standalone in-line; JLR ops exceeds expectations
The overall results for Tata Motors (TAMO) for 3QFY12 reflected the same trend seen in 1HFY12. The standalone operating performance continued to remain under pressure with EBITDA margins at 6.4%, the lowest in the last 10 quarters, impacted by elevated marketing spends and pricing pressure in the PV business. The management expects standalone margins to remain under pressure. JLR performance in turn was significantly ahead of our expectations with EBITDA margins at 18.9% compared to our estimate of 15.3% driven by better than expected ASPs (up 1% QoQ vs. our expectation of 2% drop), largely driven by higher contribution from Evoque at 34% of LR volumes v/s 14% in 2QFY12 and lower contribution from Freelander at 13% of LR volumes v/s 22% in 2QFY12 coupled with favourable F/X impact of £60mn. Also regional mix continued to remain strong with China contributing 17.2% vs. 16% in 2QFY11 and 13% in 2QFY11. Response to Evoque continues to remain strong and management was optimistic on volume traction going forward. Though, we continue to like the JLR story, the recent run in the stock (up 60% over last 45 days) leaves limited absolute upside from current levels. Hence, we are downgrading the stock to “Hold” from “Buy” with a revised target price of Rs.300 (earlier Rs.234).

 JLR ops surprise; standalone margins in-line: JLR reported revenues £3.75bn, EBITDA of £752mn and PAT of £440mn. Higher ASPs (driven by favourable product mix change), positive F/X impact, coupled with better regional mix helped strong operating performance. Standalone operating margins at 6.4% were in line with our estimate of 6.4%.

 Con call takeaways — 1) Given high marketing and publicity initiatives for its PV portfolio, the domestic margins are likely to remain under pressure 2) Volume growth in LCV/SCV segment to remain strong, but M&HCV outlook remains challenging 3) JLR management optimistic on volume traction for Evoque. 4) Reaffirms annual capex guidance of £1.5bn 5) Pegs net automotive debt/equity at 0.5x in 3QFY12 compared to 0.7x in 2QFY12 6) Tax shield at JLR UK over £2bn – tax rate likely to remain at similar levels to that of 3QFY12 ~21%.

 Valuations and Recommendations: At the CMP of Rs286, the stock is currently trading at 5.8x FY12E consolidated EPS of Rs35.5 and 5.1x FY13E consolidated EPS of Rs40. Though, we continue to like the JLR story, the recent run in the stock (up 60% over last 45 days) leaves limited absolute upside from current levels. Hence, we are downgrading the stock to “Hold” from “Buy” with a revised target price of Rs.300 (earlier Rs.234).