Tata Motors (Q4 FY14)

• Consolidated net sales grew by 16% yoy as 23% yoy fall in standalone sales was more than offset by 5.9% yoy jump in JLR sales and steep depreciation in rupee against pound leading to translation gains

• Growth in JLR revenues was driven by 4% yoy rise in volumes and 1.8% yoy increase in realizations

• JLR OPM was at 17.2% was below our and street estimates, margins were higher by 97bps on yoy basis but were lower by 189bps on a qoq basis, weak geographic mix and adverse currency movements were key reason for the sequential decline

• OPM for standalone business substantially below estimates at a negative 7.5% and was down 946bps yoy mainly on back of operating de-leverage

• Maintain our BUY rating as we believe JLR is set to see sustained momentum in volumes from Q4 FY14 onwards and is also well placed to increase its margins

• JLR revenues for Q4 FY14 were higher by 5.9% yoy and 0.4% qoq to £5,349mn. Yoy growth was driven by both higher volumes and realizations. Total wholesale volumes for JLR were higher by 4% yoy on the back of 1.7% yoy rise in Jaguar volumes and 4.5% yoy increase in Land Rover sales. Realizations were higher by 1.8% yoy on the back of a favorable product mix supported by launch of new Range Rover Sport, new Range Rover and Jaguar F-TYPE. On a sequential basis though while total wholesale volumes were higher by 3.9% driven by 5.7% increase in Jaguar volumes and 3.6% increase in Land Rover volumes, realizations were lower by 3.4%. The fall was owing to adverse geographic mix whereby proportion of UK increased while that of China declined. Adding to the fall was unfavorable currency environment.

• At the retail level, contribution of Jaguar improved from 15.9% in Q1 FY13 to 19.3% in Q4 FY14 led by successful launch of F-Type model in Q4 FY13 and strong trend in XF model. Amongst the Land Rover models, volumes declined for all except New Range Rover which was higher by 15.4%.

• Operating margin for the quarter was at 17.2% in comparison to 16.2% in Q4 FY13 and 19.1% in Q3 FY14, lower than our and street estimates. The key reason for the decline in operating margins was the adverse geographic mix where in proportion of high margin China business was lower while that of lower margin UK business was higher. Furthermore, currency movements were adverse which caused about 100bps impact on the margins.

• Raw material costs as a percentage of sales rose 80bps yoy but declined 30bps qoq. Employee costs were higher both on yoy and qoq basis by 140bps and 40bps respectively. While overheads declined on yoy basis by 230bps, they were higher by 160bps qoq main reason being currency movements.

• Depreciation at JLR was higher by 10.8% yoy on the back of higher amortization of product development expenses capitalized over the past quarters.

• Net profit at JLR was at £449mn, a jump of 18.8% yoy and but a steep decline of 27.5% qoq.

• Driven by a strong EBIDTA of £920mn and release of £517mn cash flow from working capital changes due to reduction in inventories, free cash flows (before financing) were strong at £827mn.

• ²  The Discovery Sport which is likely to replace Freelander is likely to be launched in late 2014 while the Jaguar XE is slated to be launched in early 2015.

• ²  The China JV is all set to commence production from January 2015. The company has completed local sourcing for the first product. The Engine plant is also expected to start in Q4 FY15. In the Brazil plant the company is investing £240mn for a capacity of 24,000 vehicles and is likely to start operations by early 2016.

Standalone performance

• On a standalone basis, Tata Motors reported a revenue decline of 22.8% yoy to Rs85.5bn on the back of 32.9% yoy fall in volumes partially offset by 15% yoy increase in realizations. While M&HCV volumes continued to remain weak, the LCV segment which until Q4 FY13 was seeing robust growth has also started to slow down. The passenger car and UV segments abysmal trend continued with volumes on a sustained southward trend. Realizations were higher as contribution of M&HCV amongst the commercial vehicles was substantially higher.

• OPM slumped 946bps yoy and 156bps qoq to a negative 7.5% much below our expectations. The decline in standalone entity OPM was a result of low utilization levels being observed in passenger cars and M&HCV segments.  

• The company reported a loss of Rs8.2bn as compared to a loss of Rs3.1bn in Q4 FY13 much higher than our estimate of Rs6.9bn.

Maintain BUY rating

Tata Motors is one of our top picks in the auto sector as multiple themes are expected to play out in the next couple of years. JLR is expected to see a sustained robust trend in volumes driven by rising penetration of luxury cars in emerging economies coupled with economic recovery in the western world. Margins are also expected to remain strong on the back of operating leverage and lower discounts due to high contribution newer models. On the domestic business, a stable government will ensure investments in infrastructure and reforms in mining sector which will result in higher CV demand where Tata Motors is the market leader.  We retain our BUY rating with a price target of Rs500.