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    Initiating coverage tata motors ltd Initiating coverage tata motors ltd Document Transcript

    • TATA MOTORS Ltd. BUY Target Price `262 CMP `214 FY13 PE 5.9x Index Details We initiate coverage on Tata Motors (TML) as a BUY with a sum of the Sensex 16,452 parts (SOTP) valuation based Price Objective of `262. At a CMP of `214 Nifty 4,956 the stock is trading at 6.3x and 5.9x its estimated earnings for FY2012E & FY2013E representing a potential upside of 22.4% over a period of 12 BSE 100 8,523 months. Robust growth of the JLR business (62% of FY13 revenues) is Industry CV & PV expected to be the key trigger through continuous unveiling of new products and well diversified geographical reach in over ~170 countries. Scrip Details In addition, strong performance & sustained leadership in the domestic Mkt Cap (` cr) 57,543 CV segment and gradual momentum in the passenger vehicle is BVPS (`) 82.1 expected to drive the standalone business. Accordingly, consolidated O/sShares revenues and earnings are expected to grow to `1,87,047 crore (23.2% (Cr) 269.1 CAGR) and `11,413 crore (11% CAGR) respectively over the period AvgVol (Lacs) 23.3 FY12-13. 52 Wk H/L 260/138 STOCK POINTERS Div Yield (%) 1.8  JLR’s strong growth momentum to continue FVPS (`) 2.0 Despite the muted performance of Jaguar sales, we expect JLR volumes to post a CAGR of 17.1% over FY12-13 to ~3,34,000 units aided by the encouraging response Shareholding Pattern to the recently launched Range Rover Evoque, and brisk sales of existing Land Rover models. Additionally, the catapulting demand from fast growing markets like China, Shareholders % Russia and RoW will keep it insulated from the slowdown in UK, continental Europe Promoters 35.1 and static growth in the US. Further plans to launch 40 new models and variants over DIIs 14.6 the next 5 years should help keep the portfolio of brands fresh, invigorated and drive FIIs 24.2 growth. Public 26.1  CV sales growth to be led by SCV/LCV Total 100 M&HCV sales have experienced muted growth of 9.4% in YTD FY12. Bus volumes TTMT vs. Sensex too have also been impacted in absence of any new orders under JNNURM. However, LCV’s (+25.5% growth YTD) have managed to buck the trend and continue to grow driven by strong consumption and replacement demand from three wheelers. We believe that the interest rate cycle has peaked and with inflation coming under control, there is a strong possibility of reversal in the interest rates which should lead to resurgence in M&HCV volumes over the medium term. Consequently, we expect the segment to report 16% CAGR over FY12-13 to ~5,90,000 units partially aided by strong demand of the ACE/Magic family. Key Financials (` in Cr) Net EPS Growth RONW ROCE Y/E Mar EBITDA PAT EPS P/E (X) EV/ EBITDA(X) Revenue (%) (%) (%) 2010 92519.3 7010.9 2571.1 8.1 - 30.7 22.0 26.4 12.8 82011 123133.3 16514.5 9273.6 29.2 260.7 48.1 32.6 7.3 5.4 2012E 152787.6 19887.2 10847.2 34.2 17.0 37.8 27.6 6.3 4.5 2013E 187040.7 21517.2 11413.2 36.0 5.2 29.4 26.9 5.9 4.2- 1 of 22- Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    •  Passenger Vehicle demand to remain subdued While the growth of PV sales is expected to remain subdued over FY12-13, the faster increases in the petrol prices (~+12% since January’11) than diesel (~+9% since January’12) has led to relatively attractive pricing of diesel cars. This is especially beneficial for diesel engine based car manufacturers like Tata Motors (which is also visible from the sharp uptick in the December monthly volume sales). In addition, positive response from the new Indica Vista, revamped Indigo, improved model of Nano - Tata Nano 2012 and soon to be launched diesel version of Tata Nano are expected to sustain the volumes going forward. However, given the poor showing of -0.7% YTD on the back of increasing competition and unfavorable economic scenario in the near to medium term, we expect the passenger vehicle segment volumes to experience muted growth of 2% CAGR to ~3,08,000 units by FY13.  Subsidiaries on the growth path Other subsidiaries like Tata Daewoo Limited, Tata Motors Finance Ltd. (TMFL) and Tata Technologies are also expected to contribute to the growth story. We expect the 2nd largest truck manufacturer in South Korea’s-Tata Daewoo’s revenues and earnings to grow at a CAGR of 24% and 10% to `4,476 crore and `89 crore respectively over FY12- 13. TMFL, the financing arm of Tata Motors Ltd is in good stead to benefit from improving volumes of TML. TMFL revenues and earnings are expected to post a CAGR of 26% and 36% to `2,159 crore and `237 crore respectively over FY12-13. Tata Technologies revenues are expected to grow at a CAGR of 8.5% and earnings to remain flat at `1,470 crore and `133 crore respectively over FY12-13 on account of global exposure.  Attractive Valuations We value the diversified Tata Motors on SOTP basis at `262 per share representing an upside potential of 22.4% from the CMP of `214. The strong growth of the JLR brands, expected resurgence of M&HCV sales and relative better showing of its PV diesel portfolio compared to peers should stand the company in good stead. SOTP Valuation Assumptions Company FY 13 EPS Multiple Measure Value per share Tata Motors Standalone 4.3 10.5 P/E 45.2 Jaguar Land Rover 26.7 7.5 P/E 200.3 Tata Motors Finance 7.0 (BV) 1.5 P/B 10.5 Tata Technologies 0.4 9 P/E 3.8 Tata Daewoo 0.3 9 P/E 2.5 Target Price 262.3- 2 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    •  Company Background Established in 1945, Tata Motors is now India’s largest automobile company, and is the leader in the commercial vehicle segment. It is predominantly engaged in the manufacture of CV, passenger cars and utility vehicles. Through its subsidiaries and associate companies, it is also engaged in the manufacturing of engineering and automotive solutions, construction equipment and supply chain activities. The acquisition of UK based Jaguar Land Rover has helped Tata Motors foray into international markets and the iconic brands of Jaguar and Land Rover have become the key drivers of future growth. Organisation Structure along with Revenue share (%) Tata Motors Ltd. Tata Motors Jaguar Land Tata Technology Others Tata Daewoo Tata Motors Finance (Standalone) Rover (2.3%) (1.1%) (1%) (0.9%) (38.7%) (56%) Source: Tata Motors  JLR’s strong growth momentum to continue Despite the muted performance of Jaguar sales, we expect JLR volumes to post a CAGR of 17.1% over FY12-13 to ~3,34,000 units aided by the encouraging response to the recently launched Range Rover Evoque, and brisk sales of existing Land Rover models. Additionally, the catapulting demand from fast growing markets like China, Russia and RoW will keep it insulated from the slowdown in UK, continental Europe and static growth in the US. Further, plans to launch 40 new models and variants over the next 5 years should help keep the portfolio of brands fresh, invigorated and drive growth. We expect JLR earnings to post a CAGR of 24% to GBP 15.1 bn and earnings to grow at a CAGR of ~4% to GBP 1.1 bn by FY13.- 3 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    • Revenue and PAT (GBP in mn) 16000.0 1200 14000.0 1000 12000.0 800 600 10000.0 400 8000.0 200 6000.0 0 4000.0 -200 2000.0 -400 0.0 -600 FY09 FY10 FY11 FY12E FY13E Revenues PAT (RHS) Source: Tata Motors, Ventura Research Estimates Land Rover to spearhead sales Since the takeover of ailing JLR in 2008, the Tata’s have managed to turn around and steer the former to a high growth trajectory. Volume in both retail (2,40,905 units; +16% YoY jump in FY11) as well as wholesale (2,43,621 units; +26% YoY in FY11) have grown handsomely. Despite lackluster growth in traditional markets of UK, continental Europe and USA, forays into newer geographies notably Russia, China and RoW have helped spearhead the growth. This re-shuffle of geographical market share growth has not only helped grow volumes but introduction of newer products and premium pricing has helped improve realizations. Despite the fact that Jaguar is to experience stagnant growth, overall volume growth is expected to be driven by the Land Rover range of vehicle through a strong product pipeline and presence in over 170 countries. Jaguar and Land Rover Volumes 300000 250000 200000 150000 100000 50000 0 FY09 FY10 FY11 FY12E FY13E Jaguar Land Rover Source: Tata Motors, Ventura Research Estimates- 4 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    • Jaguar Retail Sales in H1 FY11/12 Land Rover Retail Sales in H1 FY11/12 10000 25000 9000 8000 20000 7000 6000 15000 5000 4000 10000 3000 2000 5000 1000 0 0 UK North China Europe Russia Rest of UK North China Europe Russia Rest of America World America World H1 FY11 H1 FY12 H1 FY11 H1 FY12 Source: Tata Motors, Ventura Research Estimates Source: Tata Motors, Ventura Research Estimates Evoque platform to fill gaps in Land Rovers product portfolio Traditionally portrayed as a large SUV player, Land Rover has recently forayed in the compact SUV segment. This new strategy has paid off well as can be observed by the encouraging response received from the recently launched Evoque (30,000 pre- bookings). Land Rover Product Portfolio 90000 In $ 80000 Range Rover 70000 Range Rover 60000 Sport 50000 Discovery Evoque 40000 Freelander 30000 20000 10000 0 0 1 2 3 4 5 6 Source: Tata Motors, Ventura Research Estimates Competition to the Land Rover range Land Rover Audi BMW Cadillac Mercedes Toyota Range Rover/Sport Q7 X5 Escalade GL Land Cruiser Evoque Q5 X6 SRX M Class - Discovery Q7 X5 SRX M Class 4 Runner Freelander Q5 X3 SRX GLk 4 RunnerSource: Tata Motors, Ventura Research Estimates- 5 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    • The Evoque launch is not expected to cannibalize the existing products of JLR because of its positioning. Moreover, Evoque’s design innovations have helped check input costs and hence its lower price points are not expected to impact blended margins. JLR banking heavily on Chinese demand Notwithstanding the macro headwinds in Europe and slowdown in the US, JLR continues to post strong sales performance in emerging countries like China aided by new launches and higher disposable incomes. China has turned out to be an important market for JLR’s products portfolio over the past few quarters and volumes in the first two quarters of FY12 have more than doubled. We believe that strong preference for SUVs in China would help JLR attain strong volume growth in the medium term. In July 2010, JLR has set up its own distribution company, ‘National Sales Company (NSC) which would help improve its distribution reach and bring greater focus to its China volume story. Further, to cater to the increasing demand and offer products at competitive prices JLR is in the process of setting up a manufacturing joint venture with a local partner, as the import duties for cars in China are higher as compared to other geographies. In our view, these initiatives are positive and should help Land Rover to firmly entrench itself in the world fastest growing vehicle market. China Car Sales-Quarterly 12000 10000 8000 6000 4000 2000 0 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Jaguar land Rover Source: Tata Motors, Ventura Research Estimates UK and Europe to witness stagnant growth Historically, UK with a 20% revenue volume share has remained one of the major markets for JLR. However, the weakening economic scenario has impacted the sales volumes of the UK’s automobile industry. While the overall UK passenger segment de- grew by 4.5%, JLR volumes registered a fall of 5% in YTD CY11. However, Land Rover volumes witnessed a marginal fall of 0.42% to 34,890 units in YTD CY11 as compared to 35,036 units in YTD CY10. Thus, JLR has been able to sustain its market share at ~2.7% in the UK markets aided by the continuous unveiling of new models and the judicious expansion plan.- 6 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    • Jaguar UK Retail Sales Land Rover UK Retail Sales 3500 7000 3000 6000 2500 5000 2000 4000 1500 3000 1000 2000 500 1000 0 0 April May June July Aug Sept Oct Nov Dec April May June July Aug Sept Oct Nov Dec 2010 2011 2010 2011 Source: Tata Motors, Ventura Research Estimates Source: Tata Motors, Ventura Research Estimates JLR’s continental Europe sales lower on the back of depressed Jaguar sales JLR (with ~1% market share in the European markets) has seen its growth (-1.4%) sliding more than the 0.8% YTD de-growth of the European PV market on account of a sharp fall in Jaguar volumes of 17%. However Land Rover volumes have witnessed a marginal growth of 4.1% and thus JLR series is expected to witness flat growth over FY12-13 on the back of incremental volumes from the Land Rover series. Jaguar Europe Retail Sales Land Rover Europe Retail Sales 4,500 16,000 4,000 14,000 3,500 12,000 3,000 10,000 2,500 8,000 2,000 6,000 1,500 4,000 1,000 500 2,000 0 0 Jan Feb March April May June July Aug Sept Oct Jan Feb March April May June July Aug Sept Oct 2010 2011 2010 2011 Source: Tata Motors, Ventura Research Estimates Source: Tata Motors, Ventura Research Estimates- 7 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    • New product launches to keep the portfolio invigorated JLR plans to strengthen its business by diversifying and enhancing its product range in the premium car and SUV segments. Over the next five years, nearly 40 new product launches and variants are planned. Further JLR intends to launch a new platform every seven years with major and minor refurbishing for each model every four years and two years respectively. In line with these ambitious plans, the management has guided that it would be investing GBP 1.5 bn in fixed assets per annum over the medium term. We believe the new product launches will augur well for JLR, since changing consumer preferences regularly shift from old models to new models in the luxury car segment on account of technological advancement. Competition to the Jaguar Range Jaguar BMW Mercedes Audi Nissan Cadillac Porsche XF Series BMW 535i Merc E350 Audi A6 Infiniti M37 Cadillac SRS - XJ Series BMW 750i Merc S350 Audi A8 Quattro - - Panamera S XK Series BMW 650i Merc SL 550 - - Cadillac CTS 911 Carrera Source: Tata Motors, Ventura Research Estimates  CV sales growth to be led by SCV/LCV sales M&HCV sales have experienced muted 9.4% growth in YTD FY12. Bus volumes too have also been impacted in absence of any new orders under JNNURM. However, LCV’s (+25.5% growth YTD) have managed to buck the trend and continue to grow driven by strong consumption and replacement demand from three wheelers. We believe that the interest rate cycle has peaked and with inflation coming under control, there is a strong possibility of reversal in the interest rates which should lead to resurgence in M&HCV volumes over the medium term. Consequently, we expect the segment to report 16% CAGR over FY12-13 to ~5,90,000 units partially aided by strong demand of the ACE/Magic family. LCV sales to continue the positive uptrend. In spite of prevailing macro-economic headwinds, the LCV segment (+28% YoY growth in FY11) continues to show robust growth and has so far managed to buck the overall slowdown being witnessed in other segments. The growth has been primarily driven by the SCV segment which accounts for nearly 60% of LCV sales. Tata Motors has maintained its market share of 60% in this segment aided by strong demand for transportation of consumer goods within cities and replacement demand from three wheelers. Demand is also expected to be driven by incremental demand from Tier II and Tier III cities. TML LCV volumes witnessed a growth of 25.5% yoy to ~2,27,000 units partially attributable to the strong demand from Tata Ace/Magic family. To cater to the increasing demand for the Ace / Magic family products, the company is contemplating a brownfield expansion at its Pantnagar facility to increase the output from 3,50,000 units to 4,50,000. Further, the new LCV manufacturing facility at its existing plant in Dharwad with an initial capacity of 90,000 units p.a is on track.- 8 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    • New launches and strong product offerings by competitors like Ashok Leyland (Dost) and Mahindra and Mahindra (Maximmo and Gio) are not expected to impact the positioning of TML. However, significant capacity expansions by peers like Force Motors and Ashok Leyland in the medium term can impact the market share marginally. We expect the LCV volumes to post CAGR of 22% over FY12-13. LCV Market Share LCV Volumes and Growth 4.9% 2.5% 400000 3.3% 40.0% 350000 30.0% 300000 20.0% 250000 10.0% 30.4% 58.3% 200000 0.0% 150000 -10.0% 100000 -20.0% FY08 FY09 FY10 FY11 FY12E FY13E Tata Motors Ltd. Sales M&M Others Force Motors Ltd. Piaggio Vehicles Pvt. Ltd. LCV Volumes % growth yoy (RHS) Source: Tata Motors, Ventura Research Estimates Source: Tata Motors, Ventura Research Estimates Tata Motors product portfolio vis-à-vis competition Tata Motors Piaggio Ashok Leyland Force Motors M&M Ape Ape Trump 15, MaximmoProducts Ace, Ace Zip, Magic Super Ace Truck Mini Dost Trump 40 , GioCapacity (in tonnes) 0.5-1 1.2 0.8 0.5 1.25 0.8/ 1.1 0.8/0.5Price (in lacs) 1.9-3 .0 3.7-4.0 2.25 1.75 3.6-4.7 2.7-3 3Source; Tata Motors, Ventura Research Estimates M&HCV sales facing strong headwinds Tata Motors standalone business continues to be driven by its undisputed leadership position in the commercial vehicle segment. After registering ~30% growth in FY11, M&HCV segment witnessed severe contraction in demand in the current fiscal on account of rising interest rates and slowing industrial activity. - 9 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    • Market Share of Various Truck Players Trucks Volumes and Growth 210000 40% 190000 30% 16% 170000 20% 150000 130000 10% 110000 0% 21% 90000 -10% 70000 63% -20% 50000 30000 -30% 10000 -40% FY06 FY07 FY08 FY09 FY10 FY11 Sales growth yoy (RHS) Tata Motors Ltd. Ashok Leyland Ltd. Others Source: Tata Motors, Ventura Research Estimates Source: Tata Motors, Ventura Research Estimates Additionally, the mining ban in Karnataka has also led to nearly 10,000 truck operators remaining idle in the region. This coupled with the stagnant freight rates and rising costs of vehicle ownership has led to deferment in purchases by fleet operators resulting in a slowdown in the segment. TML being the market leader in the M&HCV segment (market share 60%) was also affected, resulting in a muted growth of 8.4% in YTDFY12. Competitive pressures building up in the bus segment. The bus segment in which TML enjoys ~40% market share has been primarily affected by abrupt freezing up of fresh orders from the public sector undertakings under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM). Tata Motors in order to expand its product portfolio has recently made a foray in the ultra luxury bus segment with the launch of Divo; pitched against its foreign rivals Daimler and Volvo which currently dominate the inter city ultra luxury coach segment. Competition is expected to intensify further in the bus segment with manufacturers like Volvo doubling capacities, new launches from Daimler and its biggest existing competitor Ashok Leyland also launching new models targeted at the BRT segment. The industry is expected to witness ~1,00,000 M&HCV capacity expansion to come on stream by FY14. However, we believe that these will not affect the leadership position enjoyed by TML.- 10 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    • Market Share of Various Bus Players Bus Volumes and Growth 28000 40% 26000 35% 10% 30% 24000 6% 25% 22000 20% 42% 20000 15% 18000 10% 5% 16000 0% 42% 14000 -5% 12000 -10% 10000 -15% FY06 FY07 FY08 FY09 FY10 FY11 Tata Motors Ltd Ashok Leyland Ltd S M L Isuzu Ltd Others Buses % Growth (RHS) Source: Tata Motors, Ventura Research Estimates Source: Tata Motors, Ventura Research Estimates With strong indications that interest rates have peaked and are expected to soften, there is a case for the industrial activity reviving leading to an uptick in the CV business. Also, steel prices (major raw material for automobiles) are expected to come down as the capacity is expected to go up by 52.8 million tonnes to 158.5 million tonnes by FY14 and the Supreme Court is expected to provide a relief to the mining ban in Karnataka which should help bring down RM costs in the near term. We expect the M&HCV volumes to post a CAGR of ~7% over FY-13 to ~2,16,000 units. M&HCV Volumes & Growth IIP and M&HCV growth 25.0% 250% 700000 40.0% 600000 20.0% 200% 30.0% 500000 15.0% 150% 20.0% 400000 10.0% 100% 10.0% 300000 0.0% 5.0% 50% 200000 -10.0% 0.0% 0% Dec, 06 Sep, 07 Dec, 07 Sep, 08 Dec, 08 Sep, 09 Dec, 10 Sep, 06 Dec, 09 Sep,11 Sep, 10 June, 10 June,11 March,11 Jun, 06 Mar, 07 Jun, 07 Mar, 08 Jun, 08 Mar, 09 Jun, 09 Mar, 10 100000 -20.0% -5.0% -50% FY08 FY09 FY10 FY11 FY12E FY13E -10.0% -100% M&HCV Volumes % growth yoy (RHS) Industrial Production (General) M&HCV Growth (RHS) Source: Tata Motors, Ventura Research Estimates Source: IAS, Ventura Research Estimates- 11 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    •  Passenger Vehicle demand to remain subdued While the growth of PV sales is expected to remain subdued over FY12-13, the faster increases in the petrol prices (~+12% since January’11) than diesel (~+9% since January’12) has led to relatively attractive pricing of diesel cars. This is especially beneficial for diesel engine based car manufacturers like Tata Motors (which is also visible from the sharp uptick in the December monthly volume sales). In addition, positive response from the new Indica Vista, revamped Indigo, improved model of Nano - Tata Nano 2012 and soon to be launched diesel version of Tata Nano are expected to sustain the volumes going forward. However, given the poor showing of - 0.7% YTD on the back of increasing competition and unfavorable economic scenario in the near to medium term, we expect the passenger vehicle segment volumes to experience muted growth of 2% CAGR to ~3,08,000 units by FY13. PV market share PV Volumes and Growth 350000 40% 9.5% 1.6% 300000 30% 4.0% 250000 20% 35.2% 10% 200000 0% 21.6% 150000 -10% 100000 -20% FY08 FY09 FY10 FY11 FY12E FY13E Maruti Hyundai Ford Honda Tata Motors es PV Volumes % growth yoy (RHS)Source: Tata Motors, Ventura Research Estimates Source: Tata Motors, Ventura Research Estimates Tata Motors to gain market share in the diesel vehicle segment Given the negatives mentioned above, the PV segment YTD sales have remained flat. However, Tata Motors boasting of a predominantly diesel portfolio is well insulated from any slowdown and has infact improved market share in this segment to ~11.3%. Further, most of its new launches are positioned in the diesel segment viz Tata Nano Diesel, Tata Indicruz and Tata Safari Merlin which should further help consolidate market share. With Hyundai shelving its plans to set up a new diesel platform and Toyota having delayed its decision to launch an indigenous diesel car manufacturing facility limited competition is expected to work in TML’s favour.- 12 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    • TML’s Market Share in PV segment 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Apr-09 Apr-10 Apr-11 Jun-09 Feb-10 Jun-10 Feb-11 Jun-11 Aug-09 Aug-10 Aug-11 Oct-11 Oct-09 Oct-10 Dec-09 Dec-10 Market share-PV Source: Tata Motors, Ventura Research Estimates Upcoming New Launches Company Segment Brand Launch date Petrol/Diesel Price Range Maruti Compact Cervo Early 2012 Petrol 2.5-3 lacs Maruti SUV Ertiga Early 2012 Both 7-8 lacs Maruti Compact Palette Early 2012 Petrol 4-5 lacs Maruti Compact MR Wagon Mid 2012 Petrol 4-5 lacs Maruti Compact Swift Sport End 2012 Petrol - Tata Compact Indica Vista Early 2012 Electric 5.75-6.25 lacs Tata Compact Nano Early 2012 Diesel 2-3 lacs Tata MUV Indicruz Late 2012 Both 9-10 lacs Tata SUV Safari Merlin Early 2012 Diesel 8-12 lacs Tata Executive Prima Mid 2012 Both 12-14 lacs Hyundai Executive Avante Mid 2012 Both 11-12 lacs Hyundai Sedan i30 Mid 2012 Both 9-10 lacs Chevrolet Compact Spark Mid 2012 Petrol 2-3 lacs Chevrolet Compact Spark Mid 2012 Electric 3-5 lacs Fiat Compact Grande Punto Mid 2012 Both 6-7 lacs Renault Compact Sandero End 2012 Both 5-7 lacs Volkswagen Compact UP Mid 2012 Both 4.8-5.3 lacs Source: TML, Ventura Research Estimates- 13 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    •  Debt not a matter of concern While Tata Motors debt levels at `43973 crore (for FY12) seems high, however at the net debt level it stands at `22,910 crore or a net debt equity ratio of 0.8 which is expected to reduce to 0.5% in FY13, providing us with significant comfort. Further only 70% of this debt i.e. ~`30,972 crore relates to the domestic and overseas automotive business, while the rest of the debt is used to finance Tata Motors Finance Ltd. Debt levels in FY11 (` in crore) Debt Mix-Automotive and Non Automotive 50000 45000 Automotive debt to come down 40000 8713 27% 35000 Rs in crore 30000 15898 25000 48% 20000 15000 8180 25% 10000 5000 0 FY09 FY10 FY11 FY12 FY13 TML JLR TMFL and Others es Automotive Non Automotive Source: Tata Motors, Ventura Research Estimates Source: Tata Motors, Ventura Research Estimates Also short term / long term loan mix of the JLR business has significantly improved providing financial stability to the company. JLR’s improving debt profile FY09 FY11 28% 38% 62% 72% Long Term Debt Short Term Debt Long Term Debt Short Term Debt es Source: Tata Motors, Ventura Research Estimates Source: Tata Motors, Ventura Research Estimates In addition the consolidated business is expected to generate cash and cash equivalents of ~`21,000 crore and ~`24,400 crore in FY12 and FY13 respectively after taking all capex expenditure into account.- 14 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    •  Subsidiaries on the growth track Tata Daewoo Commercial Vehicles Ltd Tata Daewoo Commercial Vehicles (TDCV) - the first overseas acquisition by Tata Motors in 2004 marking its step towards globalization. In 2010, TDCV’s JV with General Motors ran into rough weather and had to be called off. Its impact was felt in the sharp de-growth during that year. Subsequently, to get the Korean business back on track and to have better control on sales and distribution TDCV set up a wholly owned sales company- Tata Daewoo Commercial Vehicle Sales & Distribution Co. Subsequently, volumes have picked up and the company has regained market share. We expect TDCV to post 23% CAGR over FY12-13 to 13,280 units aided by the stabilization of its sales company. Consequently, we expect the revenues and earnings to grow by 24% and 11% CAGR to `4,476 and `90 crore respectively. TDCV Volumes TDCV-Revenue and PAT (` in crore) 3000 5000 100 Sales impacted due to 4500 2500 the disturbance in JV with 90 GM 4000 2000 3500 80 3000 1500 2500 70 1000 2000 60 1500 500 1000 50 0 500 0 40 FY10 FY11 FY12E FY13E Tata Daewoo Volumes Revenue PAT (RHS) es Source: Tata Motors, Ventura Research Estimates Source: Tata Motors, Ventura Research Estimates Tata Motors Finance Ltd Established in 1957, Tata Motors Finance Ltd is engaged in financing of passenger cars & CV’s manufactured by Tata Motors Ltd. It currently enjoys a market share of around ~24%. Its book size was around `10,000 crore in FY11 and we expect it to grow to ~`18,000 crore by FY13 aided by growth in Tata Motors sales. Currently, it enjoys NIM’s of ~8.6%, however, on account of higher interest rates, growing competition we forecast the NIM’s to be around 7.6% in FY13. We expect revenues and earnings to post a growth of 26% and 37% CAGR to `2,159 crore and `238 crore respectively by FY13.- 15 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    • TMFL-Borrowings and Advances ROA, ROE and NIM’s 20000 18000 18.00 (%) 8.60 16000 16.00 8.40 14000 14.00 8.20 Rs in crore 12000 12.00 10000 8.00 10.00 8000 8.00 7.80 6000 6.00 4000 7.60 4.00 2000 7.40 2.00 0 FY 09 FY 10 FY 11 FY 12E FY 13E - 7.20 FY 10 FY 11 FY 12E FY 13E Borrowing Advance es ROA ROE NIM (RHS)So Source: Tata Motors, Ventura Research Estimates Source: Tata Motors, Ventura Research Estimates Tata Technologies Ltd Tata Technologies Ltd (TTL) provides a range of services including Engineering and Design, Product Lifecycle Management, Enterprise Solutions, manufacturing and product development IT services to Tier 1 automotive and aerospace OEMs and their suppliers. The company has operations across North America, Europe, Middle East and Asia Pacific region. Since, ~60% of the revenues come from Europe and North America, it is extremely vulnerable to any sharp de-growth in these economies. Consequently, we expect revenues to grow at a CAGR of 8.5% and earnings to remain flat at `1,470 crore and `133 crore repectively by FY13. TTL - Revenue and PAT (` in crore) 1,600 200 1,400 180 160 1,200 140 1,000 120 800 100 600 80 60 400 40 200 20 0 0 FY09 FY10 FY11 FY12E FY13E Revenue PAT (RHS) Source: Tata Motors, Ventura Research Estimates - 16 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    •  Key Concerns Currency fluctuation Given the wide spread geographical reach in over 170 countries, more than 60% of total revenues are earmarked in foreign currencies which serve as a natural hedge against the forex loans taken by the company. Hence apart from translational gains / losses arising from reporting in constant currency we believe the company is adequately hedged on the forex loan portfolio. TML-Foreign Currency earnings and debt (` In crore) 140,000 18,000 120,000 16,000 14,000 100,000 12,000 80,000 10,000 60,000 8,000 6,000 40,000 4,000 20,000 2,000 0 0 FY09 FY10 FY11 FY12 FY13 Foreign Currency Sales Foreign Currency Debt (RHS) Source: Tata Motors, Ventura Research Estimates Lower than expected volume growth in JLR The global economic slowdown has significantly impacted the automotive markets worldwide, particularly in the US, Europe and UK, where JLR has a significant volume exposure. In case of any adverse event in the European region, the new market forays may not be sufficient to arrest the fall in global volumes. Extreme volatility in raw material prices could hurt margins Rising raw material prices remains a key concern for the company. The volatility in the prices of steel, non ferrous and precious metals, rubber, and petroleum products and the other costs had adversely impacted the performance of TML in FY11. Profitability could be impacted to the extent the company cannot pass the increasing costs to the consumers.- 17 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    •  Financial Performance Tata Motors Ltd. (TML) reported a 27% yoy increase in revenues to `36,197.5 crore in Q2FY12 on the back of higher volumes, improved product mix and price hikes of ~1% taken in the quarter. Operating profits were higher by 12.4% yoy to `4,503.9 crore; however margins were down by 160 basis points yoy to 12.4% on account of higher raw material costs. Earnings witnessed a decline of 15.6% to `1,877.3 crore on the back of forex losses on foreign currency borrowings of `439 crore as against a gain of `127 crore in Q2FY11. Net sales for FY11 stood at `1,23,133 crore higher by 33.1% aided by strong volume growth in the domestic business and robust volumes from JLR. Operating profits were higher by 136% to `16,514 crore and margins showed an improvement of 580 basis points to 13.4% on the back of higher volumes and improved realizations. Consequently, earning were more than double to `9,274 crore from `2,571 crore in FY10. Quarterly Financial Performance Particulars Q2FY12 Q2FY11 FY11 FY10 Net Sales 36197.5 28519.2 123133 92519.3 Growth % 26.9 33.1 Total Expenditure 31693.6 24517.6 106618 85508.4 EBDITA 4503.9 4001.6 16515 7010.9 EBDITA Margin % 12.4 14 13.4 7.6 Depreciation 1330.8 1094.9 4655.5 3887.1 EBIT (EX OI) 3173.1 2906.7 11859.5 3123.8 Other Income 345.5 210.4 732.4 3123.8 EBIT 3518.6 3117.1 12591.9 6247.6 Margin % 9.7 10.9 10.2 6.7 Interest 809.7 722.1 2385.3 2465.3 Exceptional items -439.0 127.6 231.0 -259.6 PBT 2269.9 2522.6 10437.6 3522.7 Margin % 6.3 8.8 8.5 3.8 Provision for Tax 363.3 313.1 1216.4 1005.8 PAT 1906.9 2209.6 9221.2 2516.9 Minority Interest & Ass -29.6 13.4 53 54 PAT (adj for MI) 1877.3 2223.0 9273.6 2571.1 PAT % 5.2 7.8 7.5 2.8 Source: TML, Ventura Research Estimates- 18 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    •  Financial Outlook Aided by higher volumes in the domestic CV and JLR business we expect revenues to grow at a CAGR of 23.3% to `1,87,040.7 crore. Operating profits are expected to post a CAGR of 14.2% to `21,517 crore in FY13, however, higher raw material costs and other expenses are expected to drag down the EBITDA margins to 11.6% from 13.5% in FY11. Consequently, we expect the PAT to grow at a CAGR of 11% to `11,413 crore as compared to `9,274 crore in FY11. Revenue Growth PAT growth 200000 120% 14,000 JLR Acquisition 180000 100% 12,000 160000 140000 10,000 80% Rs in crore 120000 8,000 100000 60% Rs in crore 80000 6,000 60000 40% 4,000 40000 20% 20000 2,000 0 0% 0 -2,000 -4,000 es TML JLR Others Revenue Growth (RHS)Source: Tata Motors, Ventura Research Estimates Source: Tata Motors, Ventura Research Estimates  Valuation We initiate coverage on Tata Motors as a BUY with a SOTP valuation based Price Objective of `262 representing an upside potential of 22.4% from the CMP of `214. We have valued the JLR business on a P/E multiple of 7.5 in line with its global peers like BMW and Daimler. Although, they have higher number of platforms as compared to JLR their revenue and earnings growth are expected to be muted. We have valued the standalone business at a P/E multiple of 10.5 on account of its sustained leadership position in the CV segment and the gradual momentum in the Passenger vehicle segment. Further, we have assigned a 1.5 P/B multiple to TMFL (in line with peers) and other subsidiaries have been valued at 9x FY13 earnings to arrive at a target price of `262 per share. At a CMP of `214 the stock is trading at 6.3x and 5.9x its estimated earnings for FY2012E & FY2013E representing a potential upside of 22.4% over a period of 12 months.- 19 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    • SOTP Valuation Assumptions Company FY 13 EPS Multiple Measure Value per share Tata Motors Standalone 4.3 10.5 P/E 45.2 Jaguar Land Rover 26.7 7.5 P/E 200.3 Tata Motors Finance 7 (BV) 1.5 P/B 10.5 Tata Technologies 0.4 9 P/E 3.6 Tata Daewoo 0.3 9 P/E 2.7 Target Price 262.3 Comparison of JLR with global peers Consolidated Data P/E EV/EBITDA Sales growth Global Peers FY12E FY13E FY12E FY13E FY12E FY13E D/E BMW 8.6 8.3 7.3 7.1 -1% 4% 2.4 Volkswagen 6.5 5.7 5.9 5.4 1% 5% 1.4 Daimler 8.2 7.1 8.3 7.4 -1% 7% 1.6 Ford Motor Company 7.8 6.4 8.9 8.1 2% 8% 15.8 Toyota Motor Corp 26.8 12.5 16.0 10.6 23% 9% 1.1 Tata Motors 6.3 5.9 4.5 4.2 24%* 24%* 1.9 *Jaguar Sales growth Source: Bloomberg, Ventura Research Estimates Comparison of TML with peers Consolidated Data P/E EV/EBITDA Sales Growth Global Peers FY12E FY13E FY12E FY13E FY12E FY13E D/E Tata Motors 6.3 5.9 4.5 4.2 24% 22% 1.9 Mahindra & Mahindra 14.6 12.5 10.3 8.8 32.6% 14.0% 0.9 Maruti Suzuki India Limited 16.2 12.5 9.1 6.9 -0.4% 19.4% 0.03 Ashok Leyland Ltd 11.3 9.3 6.9 6.1 15.2% 13.8% 0.6 Eicher Motors Ltd 12.1 10.6 5.1 4.2 18.8% 26.8% 0.1 Source: Bloomberg, Ventura Research Estimates- 20 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    • P/E 600 500 400 300 200 100 0 Mar-02 -100 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 -200 CMP 6X 8X 10X 12X 14X Source: Tata Motors, Ventura Research Estimates P/BV 1000 900 800 700 600 500 400 300 200 100 0 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 CMP 2X 3.35X 4.7X 6.05X 7.4X Source: Tata Motors, Ventura Research Estimates EV/EBIDTA 250000 200000 150000 100000 50000 0 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 EV 4X 5.5X 7X 8.5X 10X Source: Tata Motors, Ventura Research Estimates- 21 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
    • Financials and Projection Y/E March, Fig in Rs. Cr FY 2010 FY 2011 FY 2012e FY 2013e Y/E March, Fig in Rs. Cr FY 2010 FY 2011 FY 2012e FY 2013e Profit & Loss Statement Per Share Data (Rs) Net Sales 92519.3 123133.3 152787.6 187040.7 EPS 8.1 29.2 34.2 36.0 % Chg. 33.1% 24.1% 22.4% Cash EPS 20.4 43.9 49.8 55.3 Total Expenditure 85508.4 106618.8 132900.4 165523.5 DPS 3.0 4.0 4.0 4.0 % Chg. 24.7% 24.7% 24.5% Book Value 25.9 60.4 90.0 121.4 EBDITA 7010.9 16514.5 19887.2 21517.2 Capital, Liquidity, Returns Ratio EBDITA Margin % 7.6 13.4 13.0 11.5 Debt / Equity (x) 4.3 1.7 1.5 1.2 Other Income 3123.8 732.4 1135.7 1291.2 Current Ratio (x) 1.0 1.1 1.2 1.2 Exceptional Items -259.60 231.01 -495.0 0.0 ROE (%) 30.7 48.1 37.8 29.4 PBDIT 9875.1 17478.0 20527.9 22808.4 ROCE (%) 22.0 32.6 27.6 26.9 Depreciation 3887.1 4655.5 4945.6 6145.8 Dividend Yield (%) 1.4 1.9 1.9 1.9 Interest 2465.3 2385.3 3325.0 3704.0 Valuation Ratio (x) PBT 3522.6 10437.2 12257.3 12958.6 P/E 26.4 7.3 6.3 5.9 Tax Provisions 1005.8 1216.4 1470.9 1619.8 P/BV 8.3 3.5 2.4 1.8 PAT 2516.9 9220.8 10786.4 11338.7 EV/Sales 1.0 0.7 0.6 0.5 Minority Interest & Others 54 53 60.8 74.5 EV/EBIDTA 12.8 5.4 4.5 4.2 Consolidated Net Profit 2571.1 9273.6 10847.2 11413.2 Efficiency Ratio (x) PAT Margin (%) 2.7 7.5 7.1 6.1 Inventory (days) 44.9 41.9 42.0 42.0 Raw Materials / Sales (%) 67.0 64.6 65.7 66.5 Debtors (days) 28.6 20.5 20.0 20.0 Tax Rate (%) 29 12 12.0 12.5 Creditors (days) 135.4 110.7 110.0 110.0 Balance Sheet Cash Flow statement Share Capital 570.6 637.7 637.7 637.7 Profit After Tax 2571.1 9273.6 10847.2 11413.2 Reserves & Surplus 7635.9 18533.8 27930.3 37892.8 Depreciation 3887.1 4655.5 4945.6 6145.8 Minority Interest & Others 213.5 246.6 292.2 348.0 Working Capital Changes 4626.0 -1431.8 929.5 1763.7 Total Loans 35299.5 32791.4 43973.3 44399.2 Others -3391.4 -504.6 45.6 55.9 Deferred Tax Liability 1153.6 1463.8 1463.8 1463.8 Operating Cash Flow 7692.8 11992.7 16767.9 19378.6 Total Liabilities 44873.1 53673.3 74297.2 84741.5 Capital Expenditure -5057.6 -7802.1 -16000.0 -15000.0 Goodwill 0.0 0.0 0.0 0.0 Change in Investment 655.4 -3138.1 -383.8 -24.0 Gross Block 67245.7 75047.7 91047.7 106047.7 Cash Flow from Investing -4402.28 -10940.1 -16383.8 -15024.0 Less: Acc. Depreciation 34232.4 39698.7 44644.3 50790.1 Proceeds from equity issue 1404.8 4703.2 0.0 0.0 Net Block 33013.3 35349.1 46403.5 55257.7 Inc/ Dec in Debt 325.7 -2508.1 11181.9 425.9 Capital Work in Progress 8915.9 11728.9 10500.0 10500.0 Dividend and DDT -344.9 -990.2 -1450.7 -1450.7 Investments 2219.1 2544.3 4157.0 4180.9 Cash Flow from Financing 1385.6 1204.9 9731.2 -1024.8 Net Current Assets 724.8 4051.1 13236.8 14802.9 Net Change in Cash 4676.2 2257.4 10115.3 3329.8 Misc Expenses 0.0 0.0 0.0 0.0 Opening Cash Balance 4121.3 8743.3 10947.9 21063.2 Total Assets 44873.1 53673.3 74297.2 84741.5 Closing Cash Balance 8797.5 11000.8 21063.2 24393.0Ventura Securities LimitedCorporate Office: C-112/116, Bldg No. 1, Kailash Industrial Complex, Park Site, Vikhroli (W), Mumbai – 400079This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but noresponsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned intheir articles. Neither Ventura Securities Limited nor any of the contributors accepts any liability arising out of the above information/articles. Reproduction inwhole or in part without written permission is prohibited. This report is for private circulation. - 22 of 22 - Wednesday 18th Jan, 2012 This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.