>TATA MOTORS (MERRILL LYNCH)

Gaining traction; upgrade to Buy

■ Ride domestic growth, 30% potential upside We upgrade our rating to Buy from Underperform as we expect valuations to mirror market share gain led recovery in domestic business (67% FY11E EBITDA), and we think this will more than offset the known weakness in JLR operations. We reflect this by raising our standalone EBITDA forecasts by 65% in FY10 and 62% in FY11. Our sum-of-the-parts PO of Rs420 factors in NIL contribution from JLR.

■ Buoyed by domestic operations We expect standalone business to register 54% EBITDA CAGR, on: (1) higher CV volumes due to cyclical rebound in trucks, and a spate of bus orders, and (2) stronger margins, on better vehicle realizations and soft commodity prices. Our EPS estimates of Rs18 in FY10 and Rs30 in FY11 are ahead of consensus.

■ Financial health on the mend Tata Motors’ debt of ~Rs320bn (debt/equity 1.3x), includes Rs70bn from vehicle financing and Rs25bn customer advances. We however expect leverage ratios to improve on stronger cash flows and likely equity issuance, failing which we expect further monetization of investments. By FY11, we estimate consolidated net debt/EBITDA at 2.3x, net debt/equity at 0.8x and interest cover at 2x.

■ Sum-of–the-parts value at Rs420 Our PO is based on FY11E EV/EBITDA, and driven by: (1) standalone business valued at 8x, which is a slight premium to mid-cycle sector valuations on market share gains, and (2) JLR at nil value, equivalent to 4.6x, in line with global peers.

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