Tata Motors Ltd. share price target

Weak set of numbers as Brexit continues to impact, maintain BUY on long term Disappointing quarter as JLR margins get hurt on unfavorable hedges In Q2FY17, consolidated numbers posted a 6.7% yoy topline growth while at the bottomline there was a profit of 8.48 bn v/s loss of 17.4 bn in Q2 FY16. However, on...

JLR Sep-16 wholesale volumes grew ~3.6% YoY (+25% MoM) to 52,914 units (estimate: 52,000 units), driven by F-Pace and XE. Jaguar volumes grew ~97% YoY to 16,211 units (estimate: 14,000 units), driven...

JLR Aug-16 wholesale volumes grew ~28% YoY (-3.8% MoM) to 42,260 units (estimate: 43,500 units), driven by F-Pace and XE. Jaguar volumes grew ~98% YoY to 13,038 units (estimate: 13,500 units), driven XE and F-Pace. However, volumes of other Jaguar models continued to moderate. Land Rover (LR) volumes grew ~10% YoY to 29,222 units (estimate: 30,000 units), driven mainly by growth in Freelander and Discovery Sports. JLR Aug-16 retail volumes grew ~26% YoY (-17% MoM) to 36,926 units, driven by 104% growth in retail volumes of Jaguar and 9% growth for LR. Jaguar retail volume growth was driven by recently launched F-Pace (at ~4.5k units) and XE (+50% YoY).

The stock trades at 13.3x/10.4x FY17/FY18E consolidated EPS. We raise our FY17E/18E EPS estimates by 8%/3%. We also increase our EV/EBITDA multiple for JLR to 4.5x (v/s 4x previously) to factor in a) stronger Cherry JV performance and b) favorable GBP not reflecting in FY18 estimates due to hedges. Maintain Buy with a TP of INR647 (FY18 SOTP-based) for ordinary shares and INR452 for DVR (~30% discount to TP for ordinary shares).

Tata Motors’ (TML) Q1FY17 results were below our estimates. Consolidated revenues were at | 65,895 crore (up 9.1% YoY), below our estimate of | 70,245 crore. JLR revenues came in at £5461 million (mn) (up 9% YoY), came in lower than our estimate of £5815 mn mainly on account of lower than estimated volumes. JLR wholesale volumes were at 134,334 units (up 17.4%YoY) vs. our estimate of 143,094 units. Standalone revenues were at | 10,320 crore (up 11% YoY) vs. our estimate of | 10,375 crore. The marginal miss on estimates was on account of lower than estimated ASP

Consolidated EBITDA margins at 12.9% (vs. our estimate of 14.8%) were impacted by JLR’s performance. JLR’s reported EBITDA margin for Q1FY17 was at 12.3% (down 410 bps YoY, 390 bps QoQ). However there was an adverse forex impact of £207 million, including revaluation of £84 million, mainly euro payables resulting from depreciation in pound following Brexit vote. EBITDA margins excluding FX revaluation were at 14%.Standalone margins at 6.7% (up 195 bps YoY) were marginally above our estimates of 6.6% . Consequently, consolidated PAT came in at | 2260 crore (vs. estimate of | 3120 crore). JLR reported PAT of £304 mn vs. our estimate of £444 mn. The miss on PAT was mainly attributable to lower than estimated revenues & adverse impact of forex loss of £207 million. Chery JV share of PAT at £45m (vs. estimate at ~£60 mn vs. £49 mn in Q4FY16 vs. £6 mn loss in Q1FY16. Arrive at a target price of | 660 with BUY rating.

Tata Motors Limited - TATAMOTORS believe currency fluctuations (esp post Brexit) will disproportionately affect JLR’s earnings for some time. Adjusted for one-offs, insurance claims and forex, TTMT’s 1Q was slightly below expectation. JLR’s top-line at GBP 5.46bn (+9.1% YoY) was driven by higher net ASP (+3% QoQ) (owing to GBP depreciation). The 200 bps margin miss vs est (13.8%, adjusted for FX markdowns on Euro payables) owed to launch expenses of F-Pace, Evoque Convertible and XE in the US. The India business recorded margin improvement.

They believe JLR’s volume growth momentum will remain healthy given its strong new launch pipe. The India business is also recovering with cyclical CV revival and improving traction in PVs. However, luxury auto demand in UK/EU might weaken due to rising economic uncertainty while weaker GBP will result in translation losses at JLR. Given the improving profitability at Cherry (China JV), we have revised our SOTP for TTMT to Rs 533 (up 3% from Rs 524). Maintain BUY.

In Q1FY17, consolidated numbers posted a 10% yoy growth while at the bottomline the numbers saw a dip of 64% on reported basis. However, on adjusted basis, the profits were down 52%. This fall was a result of weak JLR margin performance. Although the realizations were up by 2.9% qoq and flattish yoy, EBITDA margins adjusted for MTM losses stood at 14% as three main factors led to this performance – 1). Adverse forex hedges led by GBP depreciation. 2). Lower market incentives, mainly in China and 3). Higher launch expenses. On the standalone business side, margins came at 5.1% which were in-line with our subdued expectations. This was a result of weak MHCV sales in the quarter. PAT at ?258 mn came in lower than expectations due to higher depreciation and lower other income.

Valuation: LKP Securities have pruned down their estimates for FY17 on weak JLR margin expectations but have raised FY18 estimates as we expect better margin performance by then along with strong sales on new launches, improving Chinese demand and China JV profits. Robust domestic business may add some flavor too. The stock still looks attractive to us as it trades at a PE of 9.2x on FY18E estimates. Maintain BUY, target price raised to ?586.

Key highlights: A decent performance with JLR posting healthy margins despite currency hedgesworkingagainstit.WeseemarginimprovementmajorlyfromFY18astheimpactof currenthedgesstartsreducing.WecontinuetoseevolumesCAGRat13%inFY1718ledby new launches, strong developed market performance, and volume recovery in China. The recentsharpdepreciationinGBPboostsJLRscompetitiveness;andmarginimpactwillfade ashedgesturnfavourablemostlyfromFY18.WetweakourestimateswenowexpectJLR topost15.4%EBITDAmargininFY17(15%previously)asthecompanyreapsthebenefitsof...

Tata Motors' (TTMT) delivered strong Q1FY17 performance with healthy operating margins at JLR, post adjusting forex and incentive impact. Its consolidated Revenues/EBIDTA/PAT grew 9%/-31%/-60% YoY but down 18%/33%/60% QoQ to Rs 659bn/Rs76bn/Rs19bn (our estimate of Rs 618bn/Rs80bn/Rs21.5bn) in the quarter. Consolidated EBIDTA margin declined by 667bps YoY and 256 bps QoQ to 11.6%, impacted by product mix and geographical mix at JLR. JLR's reported EBIDTA margin declined 391bps QoQ and 411 bps YoY to 12.3%, while adjusted for forex impact margins stood at 14%. JLR's margin performance was supported by higher ASP on account of higher contribution of high end products and currency. TTMT's standalone business reported positive EBIDTA for the sixth consecutive time in last 15 quarters with EBIDTA of Rs.5.74bn, up22% YoY. It reported standalone net profit of Rs 0.26 bn as against net profit of Rs 2.9bn in Q1FY16.

Background: Tata Motors is India's leading automobile maker, and is among the top 10 auto manufacturers in the world. The company has more than 130 models spanning a wide range of Heavy, Medium & Light Commercial Vehicles, Passenger Cars and Multi-Utility Vehicles. Tata Motors is the market leader in M&HCV; and 2nd in LCV with established brand and service network including the hinterland offering the competitive advantage. Engine and transmission for some models of cars are manufactured in a JV with Fiat. The company operates out of plants at Jamshedpur, Pune, Lucknow, Sanand and Pantnagar. Jaguar-Land Rover (JLR) are key wholly owned subsidiaries of the company. JLR has...

Change in accounting standards, adverse forex impact on account of BREXIT and other non-operational items impacted the performance of Tata Motors (TML) in 1QFY17. Though we believe that adverse forex would continue to impact TML's performance in the near term due to its hedge book, weak GBP would augur well for JLR's performance on unwinding in its hedges, as JLR generates 80% of its revenue via overseas sales. Despite surprising us on revenue front, JLR's EBIDTA margin (12.3%) came below our expectation due to adverse forex movement. However, JLR's EBIDTA margin adjusted for forex loss relating to current asset/...