Buy Tata Motors - Motilal Oswal

Tata Motors' 3QFY11 performance was better than we had expected, with consolidated EBITDA margin of 15.2% (v/s our estimate of 14%) and recurring PAT of Rs24.5b (v/s our estimate of Rs21.1b). JLR continued its momentum of strong performance and reported a margin of 17.4%.

Consolidated sales grew 23% YoY (~11% QoQ) to Rs318.6b (v/s our estimate of Rs301.8b), with EBITDA margin of 15.2% (up ~340bp YoY and 70bp QoQ). Adjusted PAT grew 202% YoY (~17.5% QoQ) to Rs24.5b.

Standalone volumes grew 18% YoY (declined ~6.5% QoQ), with CV volumes growing 23% YoY (~2% QoQ). Realization grew 8.7% YoY (~7.1% QoQ). Standalone revenue grew 28% YoY (~8% QoQ) to Rs114.6b (v/s our estimate of Rs107.6b), translating into EBITDA margin of 10.4% (up 70bp QoQ, down 240bp YoY; v/s our estimate of 9.7%).

Adjusted PAT grew 4% YoY (flat QoQ) to Rs4.34b (v/s our estimate of Rs3.05b).

JLR's volumes grew 11% YoY (~15% QoQ) to 63,155 units (v/s our estimate of 60,500 units), while realization increased 21.8% YoY (~3.3% QoQ). EBITDA margin expanded by 80bp QoQ (~760bp YoY) to 17.4%, translating into PAT of GBP275m (v/s our estimate of GBP235m; GBP230m in 2QFY11).

The management mentioned that margins are sustainable in the foreseeable future, as its cost cutting initiatives and price increases in the domestic market will offset the impact of cost push and adverse forex movement in JLR and domestic business.

Valuation and view: We upgrade our EPS estimates by 12.5% to Rs165.6 for FY12 and by 18% to Rs186 for FY13, to factor in (a) higher JLR volumes and margins, and (b) higher domestic business margins. The stock is currently trading at 6.9x FY12E consolidated EPS of Rs165.6 and 10.1x FY12E consolidated normalized EPS (adjusted for R&D capitalization) of Rs113.7. Maintain Buy, with a target price of Rs1,529 (SOTP value based on FY12 estimates).

Source : Equity Bulls

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