TATA_MOTORS(TTMT.IN)-2012-09-05.ppt

automobiles & components / india 31 august 2012,tata motors ttmt in | ttm us,target price: rs263.00 rs271.00 up/downside: +15.7% share price (31 aug): rs234.30,favourable risk-reward profile jlrs new product launches should offset a moderating demand environment in the premium-car segment standalone business is likely to remain weak as mhcvs and pvs face demand headwinds raising our sotp-based target price to rs271 and upgrading to outperform on what we view as attractive valuations how do we justify our view?,as the mhcv and passenger-vehicle (pv) business are affected by weak demand and increasing competition.,forecast revisions (%) year to 31 mar revenue change net-profit change,13e n.m. n.m.,14e n.m. n.m.,15e n.a. n.a.,navin matta (91) 22 6622 8411 whats new jaguar land rover (jlr) has a robust new product pipeline, and we expect wholesale volume to improve starting from 3q fy13 as the company plans to launch four new models/variants in the subsequent three quarters. whats the impact while sales-volume growth for the premium-car segment is moderating, it is relatively strong for sport utility vehicles (suv) and in china, both of which are favourable for jlr. near term, we see additional sales-volume growth catalysts kicking in, with jlrs new product launches starting from 3q fy13 and increased throughput from the companys halewood facility (uk) with a rise in production shifts. while we still expect muted earnings growth for jlr over fy12-14, it should see healthy fcf despite high investment in product development. we expect tata motors standalone business to remain under pressure,this report marks a transfer of analyst coverage and a shift to earnings on a consolidated basis (standalone previously). we cut our earnings forecasts for jlr by 10.5% for fy13 and 4.3% for fy14, as we factor in higher product amortisation and taxes. for the standalone business, we raise our fy13e earnings by 25% to incorporate a dividend payout by jlr (excluding which, we cut our earnings forecast by 30%), and cut our fy14e eps by 31% to reflect weak sales-volume growth. what we recommend we upgrade tata motors to outperform (2) from hold (3) and raise our sotp-based six-month target price to rs271 (from rs263). following the 26% share-price fall over the past four months, the stock trades at a fy14e adjusted ev/ebitda multiple of 3.5x, which we think is a good entry point for exposure to near-term sales-volume momentum. how we differ our eps forecasts are below consensus by 12% for fy13 and 9% for fy14, reflecting primarily our lower forecasts for jlr.,eps change n.m. n.m. n.a. source: daiwa forecasts n.m. = not meaningful; we are shifting our forecasts from a standalone to a consolidated basis share price performance (rs) (%) 360 210 300 180 240 150 180 120 120 90 aug-11 nov-11 feb-12 may-12 aug-12 tata motors (lhs) relative to sensex (rhs) 12-month range 139.60-319.25 market cap (us$bn) 13.43 average daily turnover (us$m) 53.15 shares outstanding (m) 3,190 major shareholder tata group (35.0%) financial summary (rs) year to 31 mar 13e 14e 15e revenue (m) 1,881,951 2,092,636 2,323,327 operating profit (m) 175,481 192,770 206,821 net profit (m) 108,155 124,595 138,209 core eps 33.906 39.060 43.328 eps change (%) (14.3) 15.2 10.9 daiwa vs cons. eps (%) -12 -9 -4 per (x) 6.9 6.0 5.4 dividend yield (%) 2.1 2.6 3.0 dps 5.000 6.000 7.000 pbr (x) 1.8 1.4 1.2 ev/ebitda (x) 4.4 3.8 3.4 roe (%) 28.7 26.4 23.9 source: bloomberg, daiwa forecasts,important disclosures, including any required research certifications, are provided on the last two pages of this report.,jul-12,oct-11,oct-11,jan-12,may-12,feb-12,feb-12,aug-11,aug-11,sep-11,nov-11,dec-11,dec-11,mar-12,jun-12,jul-12,aug-12,apr-12,apr-12,35.6,50,45,40,35,30,25,automobiles & components / india ttmt in | ttm us 31 august 2012 how do we justify our view? growth outlook valuation earnings revisions,growth outlook,tata motors: consolidated net sales and net-profit growth,we forecast tata motors consolidated net sales to increase at a 12.4% cagr over fy12-14. we forecast the jlr business to account for 67% of overall consolidated net sales, and generate a revenue cagr of 13% over fy12-14. we forecast the standalone business to account for 29% of consolidated net sales for fy13 and for revenue to increase at a much slower cagr of 6.5% over fy12-14. we forecast tata motors consolidated net profit to see a compound annual decline of 0.4% over fy12-14, due primarily to jlrs net profit being suppressed by higher amortisation and tax expenses.,50 40 30 20 10 0 (10) (20),38.8 fy12,13.6 (13.9) fy13e,15.2 11.2 fy14e,11.0 10.9 fy15e,consolidated net sales (% yoy) source: company, daiwa forecasts,consolidated net profit (% yoy),valuation,tata motors: sotp valuation,the stock has fallen significantly from its peak level four months ago, and we believe its current valuation, with the stock trading at an adjusted ev/ebitda multiple of 3.5x for fy14e, implies a favourable risk-reward profile. since the acquisition of jlr in 2008, the stock has traded at an average one-year-forward adjusted ev/ebitda multiple of 4.1x. at our new sotp-based six-month target price of rs271, the stock would trade at a fy14e adjusted ev/ebitda multiple of 3.9x.,standalone business jlr (on normalised ebitda) other subsidiaries less: net automotive debt fair value source: daiwa forecasts *adjusted,valuation fy14e ev/ebitda* fy14e ev/ebitda* fy14e per, pbr,multiple (x) 6 3.5,value (rs bn) 302 583 76,value per share (rs) 95 183 24 (30) 271,earnings revisions the bloomberg-consensus eps forecasts for fy13 and fy14 each have been cut by about 4% over the past four months. however, we expect further eps cuts in the coming months as we believe the consensus forecasts have not factored in a higher tax rate on account of jlr having to pay tax at a marginal rate going forward. we also believe the consensus has not built in enough of an increase in depreciation and amortisation expenses on the back of several new launches over our forecast period.,tata motors: consolidated consensus eps (fy13-14e),source: bloomberg -2-,fy13 consensus eps,fy14 consensus eps,0,automobiles & components / india ttmt in | ttm us 31 august 2012 financial summary key assumptions,year to 31 mar mhcv volumes mhcv volumes (% yoy) lcv volumes lcv volumes (% yoy) passenger vehicle volumes passenger vehicle volumes (% yoy) jlr volumes jlr volumes (% yoy),2008 179,400 (3.0) 173,434 16.2 232,864 (4.8),2009 123,005 (31.4) 168,806 (2.7) 214,484 (7.9) 136,978,2010 167,142 35.9 232,124 37.5 243,145 13.4 193,982 41.6,2011 214,358 28.2 287,639 23.9 305,636 25.7 243,621 25.6,2012 221,202 3.2 371,950 29.3 314,436 2.9 314,433 29.1,2013e 206,473 (6.7) 417,372 12.2 303,744 (3.4) 356,663 13.4,2014e 226,596 9.7 476,137 14.1 358,773 18.1 395,300 10.8,2015e 241,530 6.6 532,050 11.7 403,709 12.5 434,000 9.8,profit and loss (rs m),year to 31 mar commercial/passenger vehicle,2008 260,919,2009 226,218,2010 321,149,2011 435,700,2012 501,527,2013e 497,554,2014e 563,399,2015e 616,127,jlr,385,071,494,769,698,846 1,067,424 1,252,412 1,379,768 1,541,635,others,95,596,98,099,109,274,86,734,87,593,131,985,149,470,165,565,total revenue,356,515,709,389,925,193,1,221,279 1,656,545 1,881,951 2,092,636 2,323,327,other income,0,0,0,0,0,0,0,0,cogs,(243,755),(479,660),(614,954),(790,084) (1,094,676) (1,249,950) (1,386,728) (1,539,223),sg&a,0,0,0,0,0,0,0,0,other op. expenses,(78,507),(235,730),(267,950),(309,576) (395,011) (456,520) (513,138) (577,283),operating profit net-interest inc./(exp.) assoc/forex/extraord./others pre-tax profit tax min. int./pref. div./others net profit (reported) net profit (adjusted) eps (reported) (rs) eps (adjusted) (rs) eps (adjusted fully-diluted) (rs) dps (rs) ebit ebitda,34,252 (7,431) 3,318 30,140 (8,515) 54 21,678 20,302 11.246 10.532 10.532 3.001 34,252 42,073,(6,001) (19,309) 7,472 (17,838) (3,358) (3,278) (24,474) (21,081) (9.522) (8.202) (8.202) 1.212 (6,001) 19,067,42,288 (22,397) 1,261 21,152 (8,306) 12,865 25,711 12,543 9.012 4.396 4.396 3.011 42,288 81,160,121,620 (20,454) 1,910 103,075 (12,164) 1,825 92,736 90,426 29.083 28.359 28.359 4.000 121,620 168,175,166,859 (24,946) 1,991 143,903 (17,536) 8,798 135,165 125,544 42.588 39.557 39.557 4.035 166,859 223,112,175,481 (25,503) 2,023 152,001 (43,134) (1,812) 107,055 108,155 33.561 33.906 33.906 5.000 175,481 247,679,192,770 (24,996) 3,029 170,803 (45,514) (1,894) 123,395 124,595 38.684 39.060 39.060 6.000 192,770 282,054,206,821 (21,439) 3,342 188,723 (49,728) (1,987) 137,009 138,209 42.952 43.328 43.328 7.000 206,821 314,745,cash flow (rs m),year to 31 mar profit before tax depreciation and amortisation tax paid change in working capital other operational cf items cash flow from operations capex net (acquisitions)/disposals other investing cf items cash flow from investing change in debt net share issues/(repurchases) dividends paid other financing cf items cash flow from financing forex effect/others change in cash free cash flow,2008 30,140 7,821 (8,515) 40,033 9,726 79,204 (61,313) 0 (16,813) (78,126) 42,830 (5,323) (6,597) (7,381) 23,529 2,183 26,790 17,891,2009 (17,838) 25,068 (3,358) 53,451 13,492 70,815 (253,767) 0 (17,844) (271,610) 233,890 362 (3,457) (26,465) 204,329 (653) 2,881 (182,951),2010 21,152 38,871 (8,306) 43,789 41,366 136,872 (66,601) 0 (6,117) (72,719) 2,185 6,867 (9,919) (15,172) (16,039) (1,895) 46,220 70,271,2011 103,075 46,555 (12,164) (5,952) 22,941 154,456 (96,423) 0 (4,343) (100,766) (23,818) 31,596 (14,683) (20,454) (27,359) 331 26,663 58,033,2012 143,903 56,254 400 25,215 (8,841) 216,932 (185,239) 0 (68,560) (253,799) 143,384 (30) (14,637) (14,549) 114,168 605 77,907 31,693,2013e 152,001 72,198 (29,313) (13,972) 24,129 205,043 (216,677) 0 0 (216,677) (880) 2,006 (18,533) (25,941) (43,347) 712 (54,269) (11,634),2014e 170,803 89,283 (28,521) (20,763) 23,494 234,297 (177,254) 0 0 (177,254) 28,000 0 (22,240) (25,388) (19,628) 694 38,109 57,043,2015e 188,723 107,924 (32,324) (25,113) 19,908 259,118 (195,085) 0 0 (195,085) 28,000 0 (25,946) (21,894) (19,841) 787 44,979 64,033,source: company, daiwa forecasts -3-,automobiles & components / india ttmt in | ttm us 31 august 2012 financial summary continued balance sheet (rs m),as at 31 mar cash & short-term investment inventory accounts receivable other current assets total current assets fixed assets goodwill & intangibles other non-current assets total assets short-term debt accounts payable other current liabilities total current liabilities long-term debt other non-current liabilities total liabilities share capital reserves/r.e./others shareholders equity minority interests total equity & liabilities ev net debt/(cash) bvps (rs),2008 38,332 32,946 20,605 100,790 192,674 128,634 5,662 16,984 343,953 0 113,192 23,254 136,446 115,849 0 252,294 3,855 83,120 86,975 4,683 343,953 533,860 77,517 45.119,2009 41,213 101,547 48,001 126,514 317,275 357,333 37,187 12,998 724,793 0 241,026 70,592 311,618 349,739 0 661,356 5,141 54,266 59,406 4,030 724,793 914,765 308,525 23.113,2010 87,433 113,120 71,912 152,831 425,296 385,063 34,229 8,743 853,332 0 340,773 76,435 417,208 351,924 0 769,132 5,706 76,359 82,065 2,135 853,332 935,083 264,490 28.764,2011 114,096 140,705 65,257 187,539 507,597 434,931 35,848 10,805 989,181 0 367,323 99,571 466,894 328,106 0 795,000 6,377 185,338 191,715 2,466 989,181 963,576 214,010 60.124,2012 182,381 182,160 82,368 262,978 709,888 563,916 40,937 117,434 1,432,176 0 497,698 128,418 626,116 471,490 0 1,097,605 6,348 325,152 331,499 3,071 1,432,176 1,035,789 289,108 104,2013e 128,112 191,505 91,477 275,193 686,286 708,394 40,937 103,613 1,539,231 0 510,881 131,930 642,811 470,610 0 1,113,421 6,380 415,648 422,027 3,783 1,539,231 1,093,662 342,498 132,2014e 166,221 212,246 103,041 286,005 767,513 796,365 40,937 86,619 1,691,435 0 525,728 139,437 665,165 498,610 0 1,163,775 6,380 516,803 523,183 4,477 1,691,435 1,084,247 332,389 164,2015e 211,200 234,025 114,144 300,274 859,643 883,526 40,937 69,215 1,853,322 0 539,522 147,681 687,203 526,610 0 1,213,813 6,380 627,866 634,245 5,264 1,853,322 1,068,054 315,410 199,key ratios (%),year to 31 mar sales (yoy) ebitda (yoy) operating profit (yoy) net profit (yoy) eps (yoy) gross-profit margin ebitda margin operating-profit margin roae roaa roce roic net debt to equity effective tax rate accounts receivable (days) payables (days) net interest cover (x) net dividend payout,2008 10.2 6.1 4.5 (3.6) (3.7) 31.6 11.8 9.6 24.7 6.9 19.0 15.8 89.1 28.3 19.3 95.0 4.6 26.7,2009 99.0 (54.7) n.a. n.a. n.a. 32.4 2.7 n.a. n.a. n.a. n.a. n.a. 519.3 n.a. 17.6 91.1 n.a. n.a.,2010 30.4 325.7 n.a. n.a. n.a. 33.5 8.8 4.6 17.7 1.6 10.0 7.1 322.3 39.3 23.7 114.8 1.9 33.4,2011 32.0 107.2 187.6 620.9 545.1 35.3 13.8 10.0 66.1 9.8 25.4 28.3 111.6 11.8 20.5 105.8 5.9 13.8,2012 35.6 32.7 37.2 38.8 39.5 33.9 13.5 10.1 48.0 10.4 25.1 28.4 87.2 12.2 16.3 95.3 6.7 9.5,2013e 13.6 11.0 5.2 (13.9) (14.3) 33.6 13.2 9.3 28.7 7.3 20.6 18.1 81.2 28.4 16.9 97.8 6.9 14.9,2014e 11.2 13.9 9.9 15.2 15.2 33.7 13.5 9.2 26.4 7.7 20.1 17.4 63.5 26.6 17.0 90.4 7.7 15.5,2015e 11.0 11.6 7.3 10.9 10.9 33.7 13.5 8.9 23.9 7.8 18.9 16.8 49.7 26.3 17.1 83.7 9.6 16.3,source: company, daiwa forecasts company profile tata motors is indias largest automobile company with consolidated revenue of us$30bn for fy12. it is the leader in the commercial-vehicle segment and the third-largest player in the passenger-car segment. through subsidiaries and associate companies, tata motors has operations in the uk, south korea, thailand, and spain. among them is jaguar land rover, a business comprising the two iconic british brands, which was acquired in 2008. -4-,jul-10,jul-11,jan-11,may-10,may-11,jan-12,may-12,mar-10,mar-11,sep-10,nov-10,sep-11,nov-11,mar-12,jul-12,40,35,30.0,23.7 24.3,25,0,automobiles & components / india ttmt in | ttm us 31 august 2012 we believe this segment will continue to see healthy sales-volume growth, at least in fy13, as customer appeal and the relatively low base should act as key drivers.,favourable risk-reward profile,quarterly growth trend in the suv and non-suv segments 35.2 31.0 30 22.9,premium car segment sales volume growth moderates, pricing risk may emerge suv category showing healthy growth,20 15 10 5,13.3 mar-12,6.4 jun-11,8.7 sep-11,10.4 dec-11,7.0 mar-12,4.8 jun-12,while resilient demand for premium vehicles surprised,non-suv (% yoy),suv (% yoy),positively in 2011, the persistent slowdown in economic growth worldwide this year has started to have a discernable impact on demand for premium vehicles. aggregate demand growth for a few key luxury car makers, including bmw (not rated), mercedes (not rated), audi (not listed) and jlr, has decelerated from around 13-14% yoy in cy11/fy12 to 7-8% yoy over the past couple of months. however, we note that there are a few product segments and markets that are still witnessing healthy demand, albeit with some moderation in growth levels. aggregate growth trend amongst key premium car makers 25% 20%,source: companies, daiwa note: sales volume growth above includes bmw, mercedes benz, audi and jlr among the above-mentioned set of luxury car makers, we find that the average level of volume contribution from the suv segment ranges between 25% and 30%. jlr is the only exception, with 83% of its volume coming from the suv segment, and therefore should benefit from better relative sales-volume growth for suvs. volume split across key premium car makers in the trailing four quarters 100% 17% 80%,15% 10% 5% 0%,60% 40% 20% 0%,71% 29% bmw,80% 20% mercedes,79% 21% audi,83% jlr,suv,non-suv,3mma % source: companies, daiwa note: sales volume growth above includes bmw, mercedes benz, audi and jlr if we split the product portfolio of the above- mentioned premium car manufacturers into suvs and non-suvs (sedans, coupes, convertibles, etc), we find that sales-volume growth in the suv segment has been well above the non-suv segment over the past few years. a large part of the strong growth can be attributed to the recent launches in the compact suv sub-segment, including the range rover evoque and audi q3, which has possibly prompted erstwhile sedan buyers to shift to this category, in addition to widening the target customer base itself.,-5-,source: companies, daiwa demand in china and the us still resilient, while europe weakens further within the key regional markets for luxury cars, we find a divergence in sales volume growth rates. europe, one of the largest markets for premium cars, has seen a marked slowdown in demand over the past three quarters as the sovereign-debt crisis has affected several countries in this region. in markets such as spain and italy, sales of premium vehicles are 70% lower than 2007 levels. germany, home to some of the major premium car manufacturers and the single largest market in europe, has also started witnessing a,27%,22%,17%,jlr,38.1,0,14%,automobiles & components / india ttmt in | ttm us 31 august 2012,moderation in demand. premium car demand in the north america market, especially in the us, is still holding up, and according to the outlook shared by the managements of bmw/ mercedes and audi, volume growth