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Spark Capital: Tata Motors 1QFY14 Results: JLR momentum remains strong; Maintain Buy




Spark Capital Advisors(India) Private Limited


08 Aug 2013





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JLR momentum remains strong; Maintain Buy Tata Motors’ consol revenue grew 8% yoy. EBITDA margin was down 60bps qoq to 13.3% while PAT declined 23% yoy. JLR reported a 12% growth in revenues driven by a 58% jump in Jaguar volumes, flat Land Rover volumes and ~4% growth in realizations. Margins reported at JLR stood at 16.5%. We expect sustained volume momentum at JLR and maintain our positive stance on the stock. Jaguar reported strong volumes during the quarter, with wholesale volumes excluding the newly launched F-Type growing 30% yoy. This has been driven by the smaller power-train and AWD offerings, and the sport-brake version of the Jaguar XF. Land Rover had a flat quarter due to the run-out of the outgoing Range Rover Sport. We expect strong volume growth in Jaguar to continue and volumes in Land Rover to improve with the Range Rover Sport launch and expect a 10% and 13% volume growth at JLR in FY14 and FY15 respectively. EBITDA margins at JLR were up ~180bps yoy driven by favourable product mix (~150bps) and currency tailwinds (~50bps). Further, given a higher share of new products to the portfolio incentives were lower and we believe the launch of the new Range Rover Sport augurs well for margins and incentives. However, we expect marketing and launch expenses for new products to kick in going forward and expect EBITDA margins to sustain at 15% for the rest of FY14 and FY15. The standalone business continues to remain weak due to the weak commercial vehicle industry volumes and the weak passenger car product portfolio. We factor in a volume recovery in the commercial vehicle business in FY15 and a low base driven growth for the passenger vehicle business. Elevated discounts in the commercial vehicle business continued to affect margins. We expect margins to remain weak in the next two quarters and improve from Q4FY14 onwards. Valuation: We value the stock on an SOTP basis at a TP of Rs 357. We expect standalone revenues to be flat from FY12-15 and EBITDA margins to decline from 7.7% to 7.1% in the same period. In JLR we expect FY12-15 revenue and EBITDA CAGR of 17%. We value the standalone business at Rs 31 (7x FY15 EBITDA) and other subsidiaries and investments at Rs 21 per share. We value JLR at Rs 305 assigning 3.5x FY15 EV/EBITDA. We maintain our Buy rating on the stock. Other Takeaways: (1) Pension liability at JLR stood at GBP 600mn and will entail ~GBP 50-75mn of cash outflow per year for seven to eight years (2) JLR channel inventories range from 30 to 45 days depending on the market and no pile-up has been seen in China inventories (3) GBP 1.2bn of product development spends and GBP 1.5bn of capex (for Chery JV, UK engine plant, tooling for RR Sport at Solihull, expansion at Halewood and Castle Bromwich.

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