Tata Motors (Q4 FY12)

CMP Rs276, Target Rs309, Upside 11.9% 

• Consolidated net sales jumped 43% yoy aided by robust 51.5% growth in JLR

• JLR OPM was at 14.6% much lower than ours and street estimates, a fall of 546bps sequentially

• OPM for standalone business at 9.1% was higher than our expectation mainly on account of benefits of operating leverage

• Margins to remain at current levels for domestic business, while JLR margins would be dependent on currency movements

• Net automotive debt/equity at consolidated levels is currently at 0.25x

• Revise our 9-month price target to Rs309 and recommend BUY

±  Tata Motors reported a revenue growth of 14.4% yoy to Rs164bn primarily driven 16.9% yoy surge in volumes, partially offset by 2.2% decline in realizations. Jump in volumes was backed by strong consumption demand driving LCV volumes and rising market share in MHCV/ICV trucks. Realizations were lower despite more than 3% price hikes taken during the year on the back of adverse product mix. In the domestic market, passenger car volumes jumped 18.7% yoy and CV sales witnessed 15.8% growth. Export volumes were also higher by 16% to 17,877 vehicles.

±  OPM increased 37bps yoy and 268bps sequentially to 9.1% in Q4 FY12. This was much higher than our and street expectations. Benefits of operating leverage have been a key reason for the increase in margins on yoy as well sequential basis with both personnel costs and overheads witnessing declines. On a sequential basis, material costs (including purchases) were also lower by 48bps.

±  While operating profit grew by 19.2% yoy, PBT was higher by 33.7%. This was on the back of 19.2% surge in other income and 1.4% fall in interest expenses. Higher depreciation was on the back of capitalization of assets of Dharwad plant.

±  JLR revenue for Q4 FY12 jumped 51.5% yoy and 10.6% sequentially to £4,144mn. Yoy growth was driven by 48.2% jump in volumes and 2.2% rise in realizations (better product mix). On a qoq basis, while realizations were lower by 2.6%, volumes increased by 13.6%. On a yoy basis, regional mix also improved with sharp jump in contribution of China from 12.8% in Q4 FY11 to 19% in Q4 FY12.

±  In terms of geography-wise performance (retail sales), volume was driven by strong growth in markets like China (109% yoy) and Europe (excl. Russia) (65% yoy). That apart, sales in Russia and ROW were higher by 19% and 54% respectively. UK and North American volumes witnessed 13% and 31% growth on yoy basis.

±  Operating margin for the quarter was at 14.6% in comparison to 15.8% in Q4 FY11 and 20.1% in Q3 FY12 much lower than our and street estimates. Main reason for this was higher overheads which were on the back of higher cost of new facilities and higher employee costs. Additionally, in Q3 FY12 Evoque was in launch phase which is characterized by higher purchase of high-end models. This got stabilized in Q4 FY12.

±  Net profit at JLR was at £696mn as against PBT of £530mn owing to a deferred tax credit of £166mn.

Key takeaways from the conference call

±  Domestic margins to be maintained at current levels on the back of austerity measures implemented by the company in Q4 FY12.

±  Dealerships in China are growing at a rapid pace and have currently reached 100 and the company is aiming to reach 130 in the near term.

±  New Range Rover model is expected to be announced in September 2012 and deliveries are expected to commence in CY13.

±  Employee costs are likely to increase going ahead with addition of more shifts and higher research and development activities.

Recommend BUY

Tata Motors stock has witnessed steep correction in the recent past following a below expected JLR sales for the month of April 2012. With lower than expected margins in Q4 FY12 for JLR, stock will come under additional pressure. However, the correction can be taken as an opportunity to BUY as domestic business sees a strong recovery and JLR volume momentum to sustain. Additionally valuations are attractive at current levels. We Recommend BUY with a 9-month target price of Rs309.