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Spark Capital: Tata Motors 3QFY13 Results: Standalone business bites hard; JLR momentum intact. Maintain Add.




Spark Capital Advisors(India) Private Limited


20 Feb 2013





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Standalone business bites hard; JLR momentum intact. Maintain Add. Tata Motors’ consol revenues grew 2% yoy. EBITDA margins were flat qoq while earnings halved yoy driven by a loss of Rs 4.58bn in the standalone business and higher amortization in JLR. We expect sustained volume growth in JLR driven by the launch of AWD and 2.2L power-train variants in XF and XJ, ramp-up of the new Range Rover, new launch of RR Sport, the F-Type and the XF Sportbrake. We estimate a sequential increase in realizations driven by the Range Rover ramp-up, AWD variants and the F-Type. D&A in JLR during the quarter increased from a run-rate of GBP 120mn to GBP170mn. We believe this is driven by amortization of the development expenses for new Range Rover. We expect the amortization charge for the RR Sport to be lower given the shared platforms. However, we expect other product launches such as AWD variants, new engines and the F-Type to drive a sequential increase in amortization. Assuming development spend run rate of GBP 1bn and a 7 year life, we expect the amortization charge to be higher by ~GBP 400mn by FY15. Coupled with higher depreciation from the engine plant and China JV, we expect FY15 D&A to come in at GBP 1.3bn. We also increase our D&A estimate for FY14, which drives the downgrade to our FY14 earnings. We believe the standalone business will remain under pressure until a cyclical CV demand recovery. The discounting environment continues to be intense and a reduction in discounts at the current volume run rate can lead to a margin improvement. We factor in lower discounts from 2QFY14. In LCVs, we expect growth to moderate from 2HFY14 due to high base of the newly launched micro-trucks (Magic Iris and Ace Zip). In our view, structural improvement in the PV business which is operating below breakeven volumes is a challenging task and new product investments will strain cash flows in the near term. Given that the company is launching only new variants, and has not revealed any new products in the pipeline, we believe volumes will continue to be weak. Accordingly, we expect this business to continue depressing standalone margins. We factor in losses in the domestic business for the next two quarters and expect a gradual return to profitability starting from 2QFY14. Valuation: We value the stock on an SOTP basis at our revised TP of Rs 341 (earlier 279). We expect standalone revenues and EBITDA to grow at a FY12-15 CAGR of 4% and 0.3% respectively. In JLR we expect FY12-15 revenue and EBITDA CAGR of 23% and 20% respectively. We roll forward to FY15 and value the standalone business at Rs 31 (10x FY15E PAT) and other subsidiaries and investments at Rs 30 per share. We value JLR at Rs 279 assigning 4x FY15 EV/EBITDA. We maintain our Add rating on the stock.

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