Tata Motors Ltd - MP (Target Price Rs693, Upside 1.6%)

JLR volumes nearly triple in January 2010

During January 2010, Jaguar-Land Rover global volumes were at 16,269 vehicles (up 195% yoy), slightly lower than our monthly run-rate assumption of 17,000 vehicles for Q4 FY10. The mix though was substantially different than our assumption. While Jaguar volumes were lower than expected, Land Rover volumes were higher than estimates. We have lowered our sales volumes assumptions for FY10 and FY11 from 181,200 and 199,320 to 180,200 and 198,220.

Current European crisis a key headwind for JLR

It is widely anticipated that global economic recovery would be slower than expected as effects of stimulus packages announced during last year fades off. Further, with China tightening its monetary policy and India expected to take few more steps, non-OECD demand growth would be slower. With debt levels vis-à-vis GDP at alarming levels in few European countries, impact of the financial crisis that unfolded in 2008-09 seems to long lasting. With Europe accounting for substantial part of JLR volumes, scale of the current European crisis would be a key headwind.

Domestic CV recovery faster than expected

With IIP growing at 16.8% in December 2009, highest in more than 15 years, and underlying factors (auto sales, cement dispatches, etc) indicating towards a continued momentum, demand for commercial vehicles is expected to remain strong in the near term. Growth would be accentuated by the ensuing change in emission norms, which would translate into higher prices for CVs. We are revising our M&HCV volume growth assumption for FY11 and FY12 from 7.5% and 5% to 10% and 7.5%, while that of LCVs from 10% and 7.5% to 12.5% and 10% respectively.

Valuations fair at current levels, maintain MP rating

We believe that the current price adequately factors in the key growth triggers, which include 1) domestic CV volume growth, 2) recovery in JLR volumes, 3) improvement in JLR profitability and 4) margin expansion in domestic business. Future concerns include 1) pressure on margins due to higher commodity prices and rising competition, 2) slower than expected economic recovery 3) roll back of excise benefits and 4) high level of debts on books. We maintain our Market Performer rating but raise target price to Rs693.