Buy Tata Motors Ltd: Fairwealth Securities

TATA MOTORS LTDTata Motors Ltd. reported an almost four fold jump in its consolidated net profit to Rs 2,424 cr for the Dec quarter, beating market forecasts. Revenues (Conso.) saw 22% jump due to strong demand and better realizations from JLR products. Premium brands Jaguar and Land Rover pushed the overall margins. However, standalone net profit remained subdued, and Tata Daewoo (100% subsidiary of TML) posted a loss in the Dec quarter. Strong cash flows allowed TML to repay debt and bring the debtequity ratio down to 0.8 from 1.73 (Sep, 2010 conso). At the CMP of Rs 1238, the stock trades at a PE of 42.7 with an EPS of Rs 28.99 on TTM basis. Going forward, we expect India business to be under pressure given slowing M&HCV growth and weakening car franchise. Under the Jaguar brand four products are under development, a small sports car, station wagon, entry level sedan and a crossover. Thus the muted performance of the domestic business would continue to be offset by JLR numbers.

Robust performance of Land Rover

In 3Q, Jaguar’s global retail sales dipped 11% YoY whereas Land Rover retail sales remain strong across regions. Land Rover accounts for 80% of JLR’s total volumes and profits. Going forward, JLR has plans to spend more on product development and technology which in turn is expected to help TML to post good numbers.

JLR’s commendable margin improvement

EBITDAM improved by 80bps QoQ to 17.4% driven by geographical improvement and better realizations. We expect margins to improve going ahead given the initiated cost reduction techniques by the company.

Tata Motors reported strong numbers with consolidated net profits at Rs 2,420cr for Dec quarter against Rs 650cr in the corresponding quarter in previous year and market expectation of Rs 2186cr. A steep surge in profits largely contributed to robust sales in its domestic market and improving demand at its Jaguar and Land Rover (JLR) unit.

• Consolidated revenues increased by 22.00% to Rs. 31685cr versus Rs. 25974cr in the corresponding quarter of previous year. This growth was mainly led by its subsidiaries JLR, HV Axles and HV Transmission who posted a revenue growth of 35.6%, 19.7% and 35.1% respectively.

• On Standalone Basis TML’s revenue was up 28.40% to Rs. 11519.6cr in Dec quarter as compared to Rs. 8974.10cr in Q3FY10. Company’s net profit rose just 2.5% YoY to Rs 410.10cr on the back of higher raw material cost which saw a rise of 31.85% to Rs. 10351.28cr. PBT declined by 4.3% to Rs 531.20cr as against Rs. 555.00cr in Q3FY10.

• Standalone EBITDA margins witnessed a decline of 240bps to 10.40% on the back of higher commodity prices & emission. However, consolidated EBITDA margins improved by 340bps to 15.2% as company initiated cost reduction techniques in the past.

• In Q3FY11, TML’s Commercial Vehicles (CV) sales grew 23.24% on account of strong growth in M&HCV (up 17.2%,
50883 units) and LCV (up 27.7%, 74617 units). Supply constraints emanating from emission norm changes in the early Dec quarter (emission norms changed w. e. f. Oct 1, 2010) dampened volumes mainly in M&HCVs. Domestic CV segment of TML posted a growth of 19.11% growth on yearly basis.

• Growth in Bus segment was lower in the reported quarter due to higher base effect of large volumes in the corresponding quarter under JNNURM scheme. Growth in LCV segment was led by Ace family which took the numbers to 74617 units from 58425 units in the previous year. Ace platform is the volume driven growth for the company. Company has planned to launch some new products under the Ace platform in the coming financial year to meet the demand.

• Tata Motors Ltd increased the prices of vehicles on an average of 1.2% plus in the third quarter of FY11 along with cost reduction initiatives to counter higher raw material costs. Company also registered strong growth in exports which were up by 55% due to robust growth of 93.4% in LCV’s. Performance of CV in overseas market was largely boosted by improved economic conditions in the key exports market (SAARC, South Africa).

• Jaguar and Land Rover’s EBITDA increased by 141.1% and margins improved by 760bps in this quarter to 17.4%. PAT came in at £ 275 mn against £ 55 mn in the corresponding quarter of last year. EBITDA margin improved significantly on the back of better product and market mix, exchange and margin improvement pressures. Exchange rates remained a positive contribution towards the results. It is the fifth consecutive quarter when JLR posted improved numbers in terms of net profits. Average selling price has also contributed towards the better results. Jaguar Land Rover global retail volumes for the three month period ending December 31, 2010 have shown a 6% improvement over the same period last year. Higher revenues were particularly marked in China where volumes grew 72%, with Russia (up, 24%) and North America (up, 16%). However, lower volumes were witnessed by UK and Europe (excluding Russia) which were down by 13% and 12% respectively. Overall scenario looks attractive for TML because peer group in the luxury cars segment is not able to meet the emerging demand due to capacity constraints.

Tata Daewoo’s volumes contracted to 1905 units in this quarter against 1951 units in the corresponding quarter of the previous year, mainly due to lower sales in the domestic market. Revenue increased by 12.30% to Rs. 658.2cr. Company’s market share in M&HCV segment came in at 25.5% vs. 27.8% in Q3FY10 with a loss of Rs. 4.4cr as compared to Rs 1.9cr in the corresponding quarter of previous year. TDSC, a distribution company was launched in July 2010 which is fully operational now and is the sole distribution company for TDCV in the domestic market after termination of vehicles sales agreement with DMSC w. e. f. Nov 1, 2010.

• Revenues of Tata Motors Finance Ltd. declined 3.70% to Rs. 331.8cr from Rs. 344.6cr in the same period of previous year. PAT declined by 16% to Rs. 32.80cr. Disbursal of the company increased by 7.4% due to higher demand of the vehicles in the economy. Company enjoyed market share of 19.5% with Net Interest Margin (NIM) of the vehicle financing business for 9m FY11 at 10.3%. The book size at the end of Dec 2010 for TMFL and TML Vehicle financing) stood at Rs. 8294cr and Rs. 331cr respectively.

• JLR completed the sale of Veneer Manufacturing Center to Lawrence Automotive Interiors Ltd. on 5th Nov.
2010.

• JLR won various award in the third quarter which include Safety Award and others. The models which received award XJ, XF, Jaguar and Evoque.

• JLR signs MOU on vehicles export to china, they have intention to sell some 40000 new Jaguar and Land Rover vehicles to the fastest growing economy, sales in china exceeded 26000, an increase of 95% over the previous year. Success in the Chinese market in 2010 was a significant contribution to JLR’s strong sales performance which saw global sales volumes more than 232000.

• On standalone, TML’s realization per vehicle grew by 9.39% and at the same time expenditure per vehicle grew by 12.56% in third quarter as compared to the corresponding quarter of previous year, this put pressure on the margin.

• TML launched Tata Winger Platinum in CV on 8th Dec. 2010 and it is a luxurious 7 seater, specifically designed to fulfill the needs of passengers who look for carriers but have to depend on UVs.

• Prices increase of 1 to 1.5% w. e. f Oct 1. 2010 and again they increased prices ,in January 2011 along with all companies, of some passenger vehicles ranging between Rs. 3,000 and Rs. 15,000, and all commercial vehicles by between Rs, 1,500 and Rs. 30,000.

• In PV, Company launched Tata Aria in October 2010. Tata Aria was launched in three trim levels- Aria Pride with top end, The Aria Prestige and Aria Pleasure, each in eight colour options.

• To boost the sales of Nano, company open sales in 12 states by December end and introduced easy financing options and fast track loan schemes for Nano customers.

• Tata Motors acquired 80% stake in Trilix Srl., Italy, and a designed and engineering company for a consideration of €1.85Mn. The acquisition is in line with the company’s objective to enhance its styling/design capabilities to global standards.

• Utility vehicles segment showed a healthy growth of 45.2% in Q3 FY11 as compared to Q3FY10 with growth in volumes of Tata Safari.

• Positive cash generation allowed the company to repay its debt and bring down the debt-equity ratio 0.8 as of December, 2010.

KEY TAKEAWAYS FROM THE CONCALL

We attended the concall of Tata Motors on 11 Feb 2011 at 7:00 PM. Key points of the concall are mention below:

• Utilization level in Medium and Heavy CV is 65%.

• Company said presently it is sufficient capacity for next 2-3 years for M&HCV and LCV and they are looking for additional capacity expansion in small vehicles range mainly for Ace family, considering the strong demand outlook.

• JLR’s revenue comes 50% in dollar linked currency, 25% in euro so there is always currency risk, impacting its margins. Company is following hedging strategies for generally 12-15 months. So volatility in exchange rates may have an impact on profitability.

• International sales volumes also improving from 10000 vehicles to 15900. • Demand for CV continues to be strong due to growth potential and volume will be healthy.

• Company is concerned about supply chain and they are taking steps to improve the situation for future. • JLR continued its investment in product and in new technology and continued its work towards improving margin.

• China contribution in sales is 11-12% (in JLR) and it remains largest growing market for the company and further opportunities being examined. Company said sales in china in increasing trend mainly due to favorable market, product mix, pricing ability discounts and regional mix up.

• Company is looking for site to assemble JLR’s products in India for the Indian market.

• Range Rover Evoque on sale in summer of 2011 -5 doors showcased at LA motor Show and it is expected that volume will be very interesting.

• 70% of NHAI projects are yet to be completed which provides huge growth potential for CV industry.

• High inflation resulting in higher fuel costs & high interest rates poses a risk to demand.

• Nano’s wholesale volume increased to 10000 units per month and has plans to produce 12000-15000 units per month from March at Sanand. The company will also start exporting the car to countries where the Indian version will be accepted.

• New product pipeline for the coming quarters-Magic Iris, Ace Zip, Variants from the prima range, vista variants, Safari Refresh.

• Due to product development and capital expenditure amortization level going up.

• Consolidated debt of the company (Auto and Vehicle financing) stood at Rs. 34000cr and automotive debt at Rs 15000cr. Company has large cash balances (did not mention amount).

• Company said they are concerned about supply chain and will take steps in future according to the situation.