Tata Motors - JLR momentum to sustain; 13.4% volume CAGR over FY12-15 - Motilal Oswal

Strong FCF to drive de-leveraging despite significant investment program

JLR product action, market expansion to drive 13.4% CAGR (FY12-15) Luxury vehicle market volume momentum remains intact. Top 4 players grew ~9.3% in FY13YTD (Apr-Aug) led by 21% growth in China. Luxury SUV (JLR's strength) growth remains robust across markets; FY13YTD, SUV volume growth is 40% for JLR and 18% for Mercedes Benz. Expect JLR's volumes to grow ~15% in FY13 leading the 13.4% CAGR over FY12-15E on the back of product expansion (40 product actions over 5 years) and further market penetration. JLR's China volumes should benefit from expected ~18% CAGR in the market over CY11-15, JLR's own dealer expansion and Chery JV enabling JLR to compete better with a production base in China.

M&HCV segment could witness strong revival in FY14

Likely bottoming out of IIP growth (1.4% in FY13, lowest since FY92), expected interest rate downcycle, and favorable macro impetus (e.g. FDI in retail) should augur well for M&HCV business. We expect Tata Motors' (TTMT) M&HCV volume to grow 10% in FY14, recovering from likely 12% de-growth in FY13. LCV volume momentum remains strong with ~20% growth in FY13YTD. Expect 15% CAGR in LCV volumes over 2 years, driven by SCVs.

Consolidated EBITDA margin to improve in FY14, strong FCF despite aggressive capex

We expect Consolidated EBITDA margin to recover 50bp in FY14 to 14.2%. JLR's EBITDA margin should improve 60bp to 15% in FY14 on the back of better mix and operating leverage. We believe TTMT has multiple levers to support/improve margins over next 3-4 years. Our estimates for FY15 are yet to factor in any benefits from the Chery JV and own engine plant in UK & India. Our estimates suggest consolidated FCF generation of INR274b over FY13-15, despite investing ~INR600b, transforming it into a net cash company by FY15.

8% upgrade in FY14 EPS; Buy with TP of INR370/223 (ordinary/DVR)

We believe JLR is on the right strategic path and is investing in the right areas, resulting in its evolution to a much stronger and balanced player in the luxury vehicle market. The CV business, which contributes ~35% to fair value, is expected to witness recovery in FY14, resulting in significant improvement in standalone operations. We are upgrading our FY14 consolidated EPS by 8.1% to INR41.1 to factor in for improvement in JLR's product mix. The ordinary/DVR stock is currently trading at 8x/4.8x FY13E and 6.5x/3.9x FY14E consolidated EPS. Maintain Buy with revised target price of INR370 (FY14 SOTP based) for ordinary share and INR223 for DVR (40% discount to ordinary).

Source : Equity Bulls

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