Wednesday, May 23, 2012

>TATA MOTORS: Buying Opportunity & Evoque demand (CLSA)

JLR’s Apr shipments saw a bigger seasonal drop than its German peers with non-Evoque sales showing particular weakness, triggering a 7% stock price correction. We believe that there are seasonal factors at play here and don’t see any evidence of a broad-based demand weakness. Our sensitivity analysis for JLR’s non-Evoque sales growth suggests favourable risk-reward. 4Q results on May 29 are likely to be strong and we expect a consol net profit of
Rs42.7bn – up 70% YoY. We see multiple positive volume and cost triggers in

JLR going forward and maintain BUY on Tata Motors.
JLR underperforms German peers in Apr with larger seasonal drop JLR’s Apr sales rose 29% YoY to 25K units but fell a sharp 31% MoM. While April is a seasonally weak month, JLR seems to have fared worse since BMW and Daimler saw a lower 21% MoM drop in Apr. The difference is even more acute if we look at JLR’s non-Evoque sales, which dropped a sharp 39% MoM and were 14% lower YoY, which is a cause for concern. Even China volumes fell 17% MoM.

No evidence yet of any underlying demand weakness
Management attributes the weak Apr sales numbers to seasonality and higher discounting by competitors in US and Europe (which has come down in May). The UK market always sees a large seasonal drop in sales in April and JLR has a higher UK exposure than its German peers, which is another possible explanation here. We note that JLR has seen an average drop of 30% in volumes from Mar to Apr in the last 10 years, though the drop has been a lower 22% in the last two years. We were expecting a lower MoM drop this year due to strong Evoque demand. Tata is not seeing any signs of demand weakness in any geography and continues to guide for 100-110K Evoque volumes for FY13 and 4-6% growth for non-Evoque
industry sales, implying FY13 volumes of 370K-385K (we are at 390K).

Sensitivity analysis suggests favourable risk-reward
Our estimates build in a growth of 8% for non-Evoque sales in FY13. If we assume just 0% growth here, our FY13-14 EPS will drop by 8% and our target price will drop to Rs340. Given that the stock is 21% below our pessimistic scenario valuation, we view risk-reward as favourable post stock correction. Multiple positive triggers still intact; reiterate BUY

We continue to like Tata Motors given multiple volume triggers in the form of Evoque ramp-up and the launch of the new Range Rover platform by end-CY12. The latter has the potential of meaningfully lifting FY14 volume expectations for JLR. Multiple cost initiatives are underway, which together with an improving regional sales-mix and favourable currency trends, should drive strong margins. 4Q results on May 29 are likely to be strong as well and we expect a consol net profit of Rs 42.7bn – up 70% YoY (consensus is at Rs38.7bn). We maintain BUY.

To read report in detail: TATA MOTORS