Tata Motors (Q1 FY13)

CMP Rs239, Target Rs250, Upside 4.4%

• Consolidated net sales jumped 30% yoy aided by robust 35.5% growth in JLR
• JLR OPM was at 14.5% better than ours and street estimates, a rise of 109bps yoy
• OPM for standalone business at 6.6% was lower than our expectation mainly on adverse product mix
• Volumes at JLR to weaken in Q2 FY13 as production of old Range Rover is discontinued
• Margins at JLR to be lower in FY13 vis-à-vis FY12
• Consolidated earnings to remain flat over the next couple of years
• Downgrade to Market Performer on absence of near term triggers to earnings. Cut our 9-month price target to Rs250

• JLR revenues for Q1 FY13 jumped 34.6% yoy but declined 12.2% sequentially to £3,638mn. Yoy growth was driven by 35.5% jump in volumes, while realizations remained flat. On a qoq basis, while realizations remained flat, volumes declined by 13%. On a yoy basis, regional mix has improved with sharp jump in contribution of China from 15.7% in Q1 FY12 to 21.5% in Q1 FY13.
  
• In terms of geography-wise performance, volume was driven by strong growth in markets like China (86% yoy) and Europe (excl. Russia) (40% yoy). That apart, sales in ROW were higher by 35% yoy. UK and North American volumes witnessed 36% and 6% growth on yoy basis.
  
• Operating margin for the quarter was at 14.5% in comparison to 13.4% in Q1 FY12 and 14.6% in Q4 FY12, slightly better than our and street estimates. Main reason for this was favorable currency movements in terms of operational parameters. This was partially offset by stabilization of model mix for Evoque from a dominant proportion of high end models in Q3 FY12 to more diversified mix in Q1 FY13.
  
• While the currency movements had favorable impact on operational performance, it had an adverse impact on currency hedges and foreign currency denominated borrowings to the tune of £97mn in Q1 FY13 as compared to a gain of £3mn in Q1 FY12.
  
• Net profit at JLR was at £236mn, an increase of 7.8% yoy but a fall of 66.1% qoq. Qoq fall was owing to higher tax rate which was as a consequence of recognition of a deferred tax asset in Q4 FY12.
  
• JLR has declared a maiden dividend of £150mn to be paid to Tata Motors in August 2012.

• On a standalone basis, Tata Motors reported a revenue decline of 8.9% yoy to Rs106bn on the back of 3.6% fall in volumes and 5.5% fall in realizations. Fall in volumes was driven by sharp decline in M&HCV and passenger car segments which was offset by decent growth in LCV volumes. Decrease in realizations was owing to the decline in proportion of M&HCV sales in total volumes.
  

• OPM declined by 170bps yoy and 246bps sequentially to 6.6% in Q1 FY13. This was lower than our expectations. Higher raw material costs, unfavorable product mix and impact of lower volumes were the key reasons for the fall in OPM.
  
• While operating profit declined by 27.6% yoy, PBT was lower by only 14.1%. This was on the back of 152% surge in other income which was owing to higher dividends from subsidiaries.

• In spite of a decline in demand, M&HCV inventories are at comfortable levels with company level inventory at 30 days and dealer level inventory at 4-6 weeks.
• The company has indicated that the margins for JLR would continue to remain weak and would be lower than achieved in FY12.
• Capex at JLR is expected to be at £2bn, of which 50% will be spent on engineering activities and remaining on physical assets.
• Volumes will be under pressure in Q2 FY13 as production of the old Range Rover model is discontinued, which will also have a negative impact on margins.
• 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.

We downgrade our rating on Tata Motors from BUY to Market Performer on the back of 1) lower margins for JLR as guided by the management, 2) near term slowdown in volumes for JLR as the production of old Range Rover is discontinued, 3) higher tax rate at JLR and 4) marked slowdown in domestic CV volumes. We expect the consolidated profit to decline by 19% yoy in FY13E. We revise our 9-month target price from Rs309 to Rs250.