Tata Motors Rating: BUY Just a bend in road not the end of...

Sector: Automobiles

Sector view: Positive

Sensex: 26,221

52 Week h/l (Rs): 606 / 279

Market cap (Rscr) : 97,082

6m Avg vol (‘000Nos): 7,451

Bloomberg code: TTMT IS

BSE code: 500570

NSE code: TATAMOTORS

FV (Rs): 2

Price as on October 03, 2015

Company rating grid

Low High

1 2 3 4 5

Earnings Growth

Cash Flow

B/S Strength

Valuation appeal

Risk

Share price trend

50

70

90

110

130

Oct‐14 Feb‐15 Jun‐15 Sep‐15

TATAMOTORS Sensex

Share holding pattern % Mar‐15 May‐15 Jun‐15

Promoters 34.3 34.4 34.4

Insti 37.2 37.3 37.0

Others 28.5 28.3 28.7

Rating: BUY Target: Rs480

CMP: Rs295

Upside: 62.7%

Company Report

Research Analyst: Prayesh Jain Ashini Shah

[email protected]

Tata Motors

This report is published by IIFL ‘India Private Clients’ research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc. The views and opinions expressed in this document may at times be contrary in terms of rating, target prices, estimates and views on sectors and markets.

October 05, 2015

Change in Estimates Rating Target

Just a bend in road not the end of road

Tata Motors stock price nosedived 53% since the beginning of February 2015 as compared to a fall in Sensex of ~10%. The underperformance is on the back of marked slowdown in demand of luxury cars in China, which is a large market for Tata Motors subsidiary Jaguar Land Rover (JLR). Temporary problems specific to JLR in China like the slow ramp up of production of locally made Evoque, phase out of Freelander and Jaguar XF, pricing issue with regards to locally made Evoque worsened the scenario for Tata Motors.

However, we believe, while the slowdown in China is for real, problems specific to JLR will be resolved soon with launch of new models, right pricing of products, deeper penetration in Chinese market and ramping up of local production. Furthermore, other countries such as UK, US and Europe are doing well for JLR. Near term margins will be under pressure but over the medium term we expect recovery with benefits of operating leverage, increased production in low cost countries, soft commodity prices and platform rationalization. Cash flows should also improve over the medium term.

Its standalone business should see sustained improvementas volumes for M&HCV continue to rise on the back of recovery in infrastructure investments and industrial activity. LCV volumes should reverse their southward journey from H2 FY16. Its passenger car business should see revival with new launches. OPM should see sharp jump on the back of operating leverage benefits, lower commodity prices and cost cutting initiatives of the company.

Post the recent slump in stock prices, valuations are highly attractive at FY17E P/E of 5.4x. While earnings are expected to decline in FY16 because of JLR, we expect a healthy 14.6% earnings CAGR over FY15‐18E. Return ratios after seeing declines in FY16E should bounce back in FY17E. Free cash flows should improve substantially in FY17E and FY18E after a significant fall in FY16. We recommend a BUY with a 1‐year target of Rs480.

Financial summary Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Revenues 262,796 279,910 312,853 332,474

yoy growth (%) 12.9 6.5 11.8 6.3

Operating profit 39,239 38,840 47,452 50,992

OPM (%) 14.9 13.9 15.2 15.3

Pre‐exceptional PAT 14,171 11,940 18,512 20,119

Reported PAT 13,986 11,940 18,512 20,119

yoy growth (%) (0.0) (14.6) 55.0 8.7

EPS (Rs) 44.0 35.2 54.5 59.2

P/E (x) 6.7 8.3 5.4 4.9

Price/Book (x) 1.7 1.3 1.1 0.9

EV/EBITDA (x) 3.5 3.7 2.9 2.6

Debt/Equity (x) 1.3 0.9 0.7 0.6

RoE (%) 23.3 18.3 22.4 20.0

RoCE (%) 21.0 17.4 20.0 19.1 Source: Company, India Infoline Research

Tata Motors

2

JLR – China slowdown just a speed-breaker China slowdown A decade ago, Chinese drivers bought just 60 lakh cars annually, less than a tenth of the vehicles sold worldwide. By last year, after an explosion of wealth for the middle and upper classes there, they bought almost 240 lakh vehicles, accounting for more than a quarter of global sales and a huge share of profits for major automakers. However, off late Chinese car markets have seen weakening of demand due to a weak economic backdrop. More prominent slowdown has been seen on the luxury end, which got further impacted by the crackdown on corruption in the Chinese government by the Chinese president. While Audi and BMW have followed the industry trend, Mercedes has seen an industry beating trend with a robust jump in volumes. JLR, on other hand, has underperformed the industry with steeper falls.

Off late Chinese car markets have seen weakening of demand due to a weak economic backdrop. More prominent slowdown has been seen on the luxury end

Trend in China volume growth for Audi Trend in China volume growth for BMW

14.2%

20.7%

26.1%23.0%

21.1% 15.0%

13.0%

22.0%

7.1%

‐2.5%

‐12.5%

‐4.1%

‐15.0%

‐10.0%

‐5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Q1 CY13

Q2 CY13

Q3 CY13

Q4 CY13

Q1 CY14

Q2 CY14

Q3 CY14

Q4 CY14

Q1 CY15

Q2 CY15

Jul‐15

Aug‐15

7.5%

22.5%

30.8%

18.3%

25.4%

21.0%

8.4%

13.3%

7.1%

‐2.5%

‐7.4%

‐1.4%

‐10.0%

‐5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Q1 CY13

Q2 CY13

Q3 CY13

Q4 CY13

Q1 CY14

Q2 CY14

Q3 CY14

Q4 CY14

Q1 CY15

Q2 CY15

Jul‐15

Aug‐15

Source: Company, India Infoline Research

Trend in China volume growth for Mercedes Trend in China volume growth for JLR

9.2%

0.6%

37.5%

15.5%

51.6%

13.4%

17.6%

15.7%

24.3%

33.9%

41.5%

53.1%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Q1 CY13

Q2 CY13

Q3 CY13

Q4 CY13

Q1 CY14

Q2 CY14

Q3 CY14

Q4 CY14

Q1 CY15

Q2 CY15

Jul‐15

Aug‐15

20.7%10.6%

42.0% 45.6%

36.1%

61.1%

22.3%

3.5%

‐20.4%

‐33.4%‐36.8%

‐31.2%

‐60.0%

‐40.0%

‐20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

Q1 CY13

Q2 CY13

Q3 CY13

Q4 CY13

Q1 CY14

Q2 CY14

Q3 CY14

Q4 CY14

Q1 CY15

Q2 CY15

Jul‐15

Aug‐15


Tata Motors

3

Underperformance of JLR is due to company specific issues JLR has underperformed the broader Chinese luxury car market owing to issues related to run‐down of few models and marketing strategies. 1) Rundown of Freelander and XF models: Freelander volumes have dipped

to almost nil in the past couple of months as the company is running down the model and replacing it with Discovery Sport, which has started retailing in March‐April 2015. XF model volumes too have seen a sharp fall in the past many quarters as the company is running down the model and is replacing it with an all new XF. The new XF has received good reviews so far.

2) Marketing issues: Evoque volumes have taken hit for JLR particularly so in

China. This was owing to a) lower than anticipated cut in pricing of the locally made model and b) perception of poorer quality of locally made model as compared to an imported one. The company has cut prices of Evoque by 5‐11% in July 2015. This was over and above the 20% lower pricing at the launch. Also, the company is taking efforts to communicate strongly about the brand in the near future.

JLR is running down its Freelander and XF models to be replaced by Discovery Sport and the New XF respectively

Pricing of Evoque has been set right with a price cut announced in July 2015

Trend in Freelander volume growth for JLR Trend in XF volume growth for JLR

44.5%

11.1%

15.0% 7.1%

‐8.9%

24.4%

0.1%‐20.8%

‐80.7%

‐99.0%

‐99.6%

‐99.5%‐120.0%

‐100.0%

‐80.0%

‐60.0%

‐40.0%

‐20.0%

0.0%

20.0%

40.0%

60.0%

Q1 CY13

Q2 CY13

Q3 CY13

Q4 CY13

Q1 CY14

Q2 CY14

Q3 CY14

Q4 CY14

Q1 CY15

Q2 CY15

Jul‐15

Aug‐15

39.5%

23.9%

39.2%43.7%

8.8%

6.9%

‐3.5% ‐4.8%

‐17.9% ‐19.0%

‐32.4% ‐31.0%‐40.0%

‐30.0%

‐20.0%

‐10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Q1 CY13

Q2 CY13

Q3 CY13

Q4 CY13

Q1 CY14

Q2 CY14

Q3 CY14

Q4 CY14

Q1 CY15

Q2 CY15

Jul‐15

Aug‐15


Trend in Evoque volume growth for JLR Pricing of Evoque base model in China

16.5%

0.1%

26.0%

16.0%

‐4.5%

19.4%

‐5.1%

‐3.3%

‐4.3%‐14.9%‐19.4%

‐57.5%‐70.0%

‐60.0%

‐50.0%

‐40.0%

‐30.0%

‐20.0%

‐10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

Q1 CY13

Q2 CY13

Q3 CY13

Q4 CY13

Q1 CY14

Q2 CY14

Q3 CY14

Q4 CY14

Q1 CY15

Q2 CY15

Jul‐15

Aug‐15

528,000

448,000

398,000

‐

100,000

200,000

300,000

400,000

500,000

600,000

Imported prior to local made launch

Locally made at launch

Locally made post price cut in July

Yuan


Tata Motors

4

These issues have continued in Q2 FY16 and have worsened with about 5,000 imported vehicles getting impacted in the Tianjin blast. This in turn will impact profit margins for the company as a whole. Ramp up in volumes for Discovery Sport and XF in China will happen only from Q4 FY16 through production from the China JV. At the China JV, commencement of production of Discovery Sport is expected in Q3 FY16 and that of the new XF is likely in H1 CY16. At the end of FY15, JLR had only 186 dealers as compared to ~420‐450 for its peers. The company plans to expand this to 250 in the next 12‐18 months. With the Cherry JV, JLR will localize manufacturing of key models including Evoque, Discovery Sport (Q3 FY16) and Jaguar XF (Q2 CY16). Also, as per the agreement with the Chinese government, the two JV partners will have to co‐develop a model in the next financial year. Localized manufacturing will reduce costs and JLR will be able to compete with its peers who have significant local manufacturing base in China.

JLR to gain from sustained strong global demand for premium cars While JLR has taken corrective actions for the marketing issues, we highlight here that, penetration of premium cars is still at lower levels in China when compared with the developed world. Apart from that, China has cut interest rates and reserve ratio (more so for auto finance companies), which should arrest the decline in demand. Also, other emerging markets such as India rank much below in terms of penetration. Developed markets such as UK and US will continue to see stable growth rates for premium cars on the back of improving economic scenario.

Proportion of premium car sales in 2014

30%

25%

21%

13% 12% 11% 11%

8% 8%6%

4%3%

0%

5%

10%

15%

20%

25%

30%

35%

Germ

any

UK

Italy

France

USA

S Korea

Turkey

Russia

China

Japan

Brazil

India

Source: BMW Investor Presentation

Premium car sales to see a CAGR of 4.6% by 2020

Source: BMW Investor Presentation, *BRIKT – Brazil, Russia, India, South Korea and Turkey

Commencement of production from the JV, new launches, expansion of dealer network and lower costs will result in improved performance

Other emerging markets such as India rank much below China in terms of penetration. Developed markets such as UK and US will continue to see stable growth rates for premium cars on the back of improving economic scenario

Tata Motors

5

New model launches from JLR will be the driving force One of the key drivers for the growth in sales for automobile OEMs is the new launches. Recently, Mercedes has been outperforming Audi, BMW and JLR substantially in the Chinese market on the back of its new launches. Going ahead, JLR has target to launch at least two new models every year till 2020. In the near future the lineup of new launches is as follows: 1) While XE has been launched, it has been restricted to only UK/Europe, it will be launched in other key markets in H2 FY16, 2) Discovery Sport will be launched in the remaining countries in the near term, 3) All new XF is expected to be launched in the near term 4) F‐Pace, a crossover will be launched in Q4 FY16, 5) Convertible variant of Evoque will be launched in Q4 FY16, 6) launch of new discovery is planned for H1 FY17, and 7) a new product between Range Rover Sport and Evoque is being planned for launch in H2 FY17. XE can to do to Jaguar portfolio what Evoque did to Land Rover Prior to the launch of Evoque, JLR had no product to compete against the Audi Q3 and BMW X1. The Evoque received outstanding success and has been a large success for JLR and now contributes nearly 30% of the volumes for the Land Rover portfolio. Currently JLR has no model to compete against Audi A4, BMW 3 Series and Mercedes C Class. These contribute approximately 20‐25% of their respective volumes. The launch of XE will fill this gap. The company expects 65,000‐70,000 annual run rate for the model. This could account for 80% of the existing Jaguar volumes. Addressable market of XE in CY14

0%

5%

10%

15%

20%

25%

30%

3‐Series Contribution to BMW A4 Contribution to Audi C‐Class Contribution to Merc

Source: Industry, India Infoline Research

Jaguar portfolio to see multi-fold jump With both new launches, the XE and F‐Pace in the Jaguar portfolio, we see a marked jump in the Jaguar volumes. The management sees F‐Pace having potential equivalent to XE. So XE and F‐Pace together can add about 130,000‐140,000 volumes per annum. While Land Rover portfolio also has new launches in the form of Evoque Convertible and the recent Discovery Sport, major thrust will come from the model that will placed between Range Rover Sport and Evoque to be launched in H2 FY17.

Robust lineup of new launches can be a large driving force for JLR volumes. The company has a target to launch at least two new models every year till 2020

Currently JLR has no model to compete against Audi A4, BMW 3 Series and Mercedes C Class. These contribute approximately 20‐25% of their respective volumes. The launch of XE will fill this gap

Tata Motors

6

Customization of products as per market requirements The earlier JLR strategy was “what is good for UK, is good for the world”. However, the company has now changed its strategy and has brought in more customization as per the market demand in different countries. For eg, in China the demand for longer wheel base product is stronger. Hence when the company will locally manufacture the XF model it will have longer wheel base when compared with the model elsewhere. Also in US, UK and Europe people prefer self drive whereas in China majority of luxury cars are Chauffer driven. To address this, the company introduced rear seat entertainment features for products being exported to China. Such customization of products will continue in the future as well and will help the company garner higher market share. Engine plant to provide flexibility as well as lower costs For supply of engines, JLR has a long term contract with Ford. The company has flexibility to modify the number of engines sourced by 5‐10% in the current year which will increase to 15‐20% next year. To diversify its source and reduce costs, JLR has started manufacturing its own engines, the capacity of which will be scaled up to 300,000 engines over the next 2‐3 years. Another 200,000 will be added in the following 2‐3 years. It is starting with a 2‐litre diesel engine and by the end of FY16 a 2‐litre petrol engine will be launched. In a 1‐1.5 year time frame the plant will start manufacturing 3‐litre engines for both diesel and petrol. It is also looking at developing a 1.6 litre engine. JLR margins to be lower in FY16 but should recover going ahead We see JLR margins to remain under pressure as seen in the past couple of quarters. However, from FY17 we see a recovery in margins as the near term impacts fade out. Positive triggers for margins: 1) Falling commodity prices: Commodity prices have seen a sharp fall in the

past few months. Since the beginning of the calendar year, steel prices have plummeted by 30%, aluminium prices have fallen 11.5% and rubber prices have declined 12.5%. Under contractual obligations the benefits of these trends in lower prices happen with a lag and hence we see these benefits fructifying in the near term. Also, with China one of the largest consumers of commodities witnessing slowdown we don’t expect any meaningful recovery in commodity prices.

2) Benefits of operating leverage: While the capacity utilization is high at existing plants in UK, shift of production for China models will free up capacities. With new model launches, these capacities will be utilised better resulting in benefits of operating leverage.

3) Platform rationalization: In the past JLR had 9 products from 7 models to

which the company has now moved to 11 products from 6 platforms. The company has target to reach to 15‐16 products from 4 platforms. This would result in optimization of product development costs, economies of scale and lower working capital requirements.

The earlier JLR strategy was “what is good for UK, is good for the world”. However, the company has now changed its strategy and has brought in more customization as per the market demand in different countries Since the beginning of the calendar year, steel prices have plummeted by 30%, aluminium prices have fallen 11.5% and rubber prices have declined 12.5% The company has target to reach to 15‐16 products from 4 platforms

Tata Motors

7

4) Cost savings from new plants in low cost countries: JLR has three new plants in the next few years a) China, b) Brazil and c) Slovakia. These countries have substantially lower labour costs and also can offer savings in the form of lower freight costs.

Negative impact on margins: 1) Lower priced products lower margins: Most of the new models that JLR is

launching are at price points lower than its average realizations currently. This will translate into lower operating margins on an overall basis.

2) Normalization of margins in China: The luxury car manufacturers, over the past few years, when luxury car demand in China was surging, enjoyed above normal margins. In the past few months, when the demand for luxury cars has dwindled there, the companies have resorted to price cuts and discounts thus bringing the margins to a more normative level. This will impact JLR as well.

3) Launch costs of new models: During FY16 and FY17, the company has lined up several new launches. These activities carry heavy initial launch costs and benefits of which are reaped over a longer period.

4) New models in more competitive segments: Most of the new launches of JLR are in the sedan segment, which is relatively more competitive than UV segment. This would mean higher marketing costs as well.

Capacity to reach 10 lakh vehicles by 2020 The current capacity at UK is 550,000. At the current plants the company has enough land to scale up to a capacity of 650,000 in 2 years. The capacity at China JV will be scaled to 130,000 in 1‐2 years. Brazil at the initial stages will have a capacity of 25,000 vehicles and will commence operations in CY17. In Slovakia the company will have a capacity of manufacturing 300,000 vehicles and will start operations in 2‐2.5 years. Overall the company has a target of having capacity of more than 11 lakh vehicles by 2020. Cash flows to improve over the longer term The company has been investing over £3bn in the past couple of years to enhance capacities and product development. Going ahead too, the company is expected to maintain that run rate. The current run rate is in the range of 15‐17% of annual revenues. Over the longer term, with revenue base likely to grow and most product development and platform rationalization execution to be done in the near term, the ratio would come down to a more normalized level of 10‐12% of revenues. Also the company expects further improvement in working capital. These would improve the cash‐flows for the company over the longer term.

New plants are in countries that have substantially lower labour costs and also can offer savings in the form of lower freight costs

Lower price point products command lower margins

Margins in China will normalize to normal levels post the slowdown

Many new launches will mean higher launch costs

New model launches are in the more competitive segment

Expanding capacities to meet the expected strength in demand

Tata Motors

8

JLR modelwise volume assumptions

FY13 FY14 FY15 FY16E FY17E FY18E

Jaguar

XF 38,303 46,662 45,921 43,625 47,987 52,786

yoy 13.8% 21.8% ‐1.6% ‐5.0% 10.0% 10.0%

New XJ 15,703 19,271 16,332 15,515 15,515 15,515

yoy ‐0.9% 22.7% ‐15.3% ‐5.0% 0.0% 0.0%

XK 3,792 3245 2,078 2,078 2,078 2,078

yoy ‐16.2% ‐14.4% ‐36.0% 0.0% 0.0% 0.0%

Now F‐Type 14 10129 12,165 12,165 12,773 13,412

yoy ‐22.2% ‐ 20.1% 0.0% 5.0% 5.0%

XE 30,000 49,500 59,400

yoy 65.0% 20.0%

F Pace 5,000 25,000 26,250

yoy 400.0% 5.0%

Total Jaguar 57,812 79,307 76,496 108,383 152,854 169,442

yoy 7.0% 37.2% ‐3.5% 41.7% 41.0% 10.9%

Land Rover

Defender 15,318 16,679 20,036 21,639 16,229 12,172

yoy ‐20.6% 8.9% 20.1% 8.0% ‐25.0% ‐25.0%

Freelander 51,986 56,712 38,729 0 0 0

yoy 10.7% 9.1% ‐31.7% 0.0% 0.0% 0.0%

Discovery 43,813 44,343 50,601 53,131 55,788 58,577

yoy ‐5.7% 1.2% 14.1% 5.0% 5.0% 5.0%

New RR Sport 56,708 64,493 85,762 90,050 94,553 99,280

yoy 33.0% 5.0% 5.0% 5.0%

RR Evoque 116,291 120,911 123,863 125,102 150,122 157,628

yoy 93.1% 4.0% 2.4% 1.0% 20.0% 5.0%

New RR 30,134 47,416 61,418 64,489 67,713 71,099

yoy 57.4% 29.5% 5.0% 5.0% 5.0%

Discovery Sport 0 0 13,600 61,200 67,320 74,052

yoy 350.0% 10.0% 10.0%

Total Land Rover 314,250 350,554 394,009 415,611 451,725 472,808

yoy 20.7% 11.6% 12.4% 5.5% 8.7% 4.7%

Total JLR 372,062 429,861 470,505 523,994 604,579 642,250

yoy 18.3% 15.5% 9.5% 11.4% 15.4% 6.2%

Of this China JV 4,044 30,000 50,000 60,000

yoy 641.8% 66.7% 20.0%

Net JLR 372,062 429,861 466,461 493,994 554,579 582,250

yoy 18.3% 15.5% 8.5% 5.9% 12.3% 5.0% Source: Company, India Infoline Research

Tata Motors

9

JLR P&L projections £ mn FY14 FY15 FY16E FY17E FY18E

Volumes 429,861 466,461 493,994 554,579 582,250

yoy 15.5% 8.5% 5.9% 12.3% 5.0%

Realizations 45,098 46,876 46,173 45,481 44,798

yoy 6.3% 3.9% ‐1.5% ‐1.5% ‐1.5%

Revenue 19,386 21,866 22,809 25,223 26,084

yoy 22.8% 12.8% 4.3% 10.6% 3.4%

RM Cost 11,904 13,185 14,103 15,516 15,964

As % of revenues 61.4% 60.3% 61.8% 61.5% 61.2%

Gross margin 7,482 8,681 8,706 9,707 10,120

Gross margin 38.6% 39.7% 38.2% 38.5% 38.8%

Staff costs 1,654 1,977 2,138 2,312 2,477

As % of revenues 8.5% 9.0% 9.4% 9.2% 9.5%

Other expenses 3,465 3,730 3,878 4,263 4,382

As % of revenues 17.9% 17.1% 17.0% 16.9% 16.8%

Total expenses 17,023 18,892 20,119 22,091 22,823

As % of revenues 87.8% 86.4% 88.2% 87.6% 87.5%

Capitalized 1,030 1,158 1,202 1,321 1,358

As % of other exp 29.7% 31.0% 31.0% 31.0% 31.0%

Net total expense 15,993 17,734 18,917 20,769 21,464

As % of revenues 82.5% 81.1% 82.9% 82.3% 82.3%

EBIDTA 3,393 4,132 3,893 4,453 4,619

EBIDTA Margin 17.5% 18.9% 17.1% 17.7% 17.7%

Depreciation 875 1,071 533 663 793

As % of gross block 8.8% 8.4% 6.5% 6.5% 6.5%

MTM 137 (373)

Net finance (154) (94)

PBT 2,501 2,594 2,571 2,904 2,862

Tax 622 576 643 726 715

Tax rate 24.9% 22.2% 25.0% 25.0% 25.0%

PAT 1,879 2,018 1,928 2,178 2,146 Source: Company, India Infoline Research

Tata Motors

10

Domestic business seeing strong traction M&HCV momentum to sustain Following two years of decline in M&HCV volumes in FY13 and FY14, FY15 saw a strong revival with volumes rising 16% yoy. During April‐August 2015 too the volumes surged 27% yoy. The growth has been mainly driven by replacement demand. The utilization has been in the region of 60‐65% of the existing fleet. With the expected recovery in infrastructure investments and a revival in industrial activities, we see this utilization inching up above the 70% levels in later part of the year. Also with expected cut in interest rates and softness in diesel prices, fleet operators profitability has improved substantially, which can drive advancement of capacity expansion plans in a positive economic environment.

Tata Motors during this phase has seen strong growth in its M&HCV volumes but has lagged behind industry growth resulting in a market share loss of ~300bps since FY14. The loss has been more pronounced in the M&HCV passenger segment where it has lost 640bps v/s 250bps in M&HCV goods. The company attributed this loss in market share to disparity in growth region‐wise, wherein South India has seen a faster growth where it has a less dominant presence. Also, the nearest competitor has an advantage of excise duty savings on its new plant which enables it to offer higher discounts.

Lower fuel prices, cut in interest rates, revival in infrastructure investments and improvement in industrial activity will result in sustained strong demand for M&HCVs

Tata Motors market share to revive with new launches and normalization of regional demand

Marginal market share loss in M&HCV goods Steady market share in M&HCV Pass

0%

10%

20%

30%

40%

50%

60%

70%

80%

‐

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

M&HCV Goods Market share

0%

10%

20%

30%

40%

50%

60%

‐

5,000

10,000

15,000

20,000

25,000

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

M&HCV Pass Market share

Source: SIAM, India Infoline Research

Robust industry volumes for M&HCV goods Muted M&HCV passenger volumes

‐50%

‐40%

‐30%

‐20%

‐10%

0%

10%

20%

30%

40%

50%

‐

50,000

100,000

150,000

200,000

250,000

300,000

350,000

FY03

FY04

FY05

FY06

FY07

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FY13

FY14

FY15

M&HCV Goods yoy

‐20%

‐10%

0%

10%

20%

30%

40%

‐

10,000

20,000

30,000

40,000

50,000

60,000

FY03

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FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

M&HCV Pass yoy


Tata Motors

11

Over the medium term, as demand stabilizes across the country, the company expects to regain market share with better products. As per the internal survey, 55% of Tata Motors CV portfolio is 5% or more fuel efficient than its competitor. 25‐30% product portfolio is better than competitors but fuel efficiency is better by 0‐5%. Only 10‐15% of their product portfolio is worse than competitor but they are working on improving that. LCV volumes to pick up in H2 FY16 While M&HCV volumes have seen a strong growth, LCV volumes have seen sharp declines. The key reason being non‐availability of finance for the small operators led by issues such as 1) absence of credit history and 2) high level of NPAs from the segment in recent past. Amidst this, Tata Motors has seen a loss in market share of 940bps in the LCV goods segment and 670bps in the LCV passenger segment. We expect the trend in demand to reverse as broad based economic recovery will result in higher demand for last mile connectivity. Also with development of newer cities, we expect demand for public transport to increase. Tata Motors with new product launches in the segment should regain some of its lost market share.

LCV volumes are likely to recover as demand for last mile connectivity increased with broad based economic recovery

Steady loss in market share in LCV Goods Steeper loss in share in LCV passenger segment

0%

10%

20%

30%

40%

50%

60%

70%

80%

‐

50,000

100,000

150,000

200,000

250,000

300,000

FY03

FY04

FY05

FY06

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FY15

LCV Goods Market share

0%

10%

20%

30%

40%

50%

60%

‐

5,000

10,000

15,000

20,000

25,000

FY03

FY04

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FY13

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LCV Pass Market share


Sharp decline in LCV Goods segment Recovery in LCV passenger segment

‐30%

‐20%

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100,000

200,000

300,000

400,000

500,000

600,000

FY03

FY04

FY05

FY06

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FY14

FY15

LCV Goods yoy

‐15%

‐10%

‐5%

0%

5%

10%

15%

20%

25%

30%

35%

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10,000

20,000

30,000

40,000

50,000

60,000

FY03

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FY14

FY15

LCV Pass yoy


Tata Motors

12

New launches can propel passenger car segment The passenger car industry in India has seen moderate trends in the past couple of years. Even in the current year, the demand has not been modestly higher when compared with FY15. Tata Motors, while seeing steep declines in FY13 and FY14, saw a modest recovery in FY15 and stronger growth so far in FY16. The weak performance in FY13 and FY14 was on the back of absence of product launches from Tata Motors. However, in the past 18 months the company launched Zest and Bolt which have found good acceptability in the markets. Resultantly, the volumes have recovered. Going ahead, the company plans to launch at least two new models every year until FY20. Also the new Revotron engine has enabled a perception change wherein customers now look for both petrol and diesel variants as compared to only diesel variants of Tata Motors in the past. In fact 60‐70% of the volumes for Zest and Bolt are for petrol variants. In CY17, the company will be launching new platforms which could be game changing for the company. In the UV space the company continues to report massive underperformance to the market owing to the lack of new products. Also, the company is adopting processes from JLR, which will help to bring in efficiencies and rein in costs.

New launches has brought some respite to the passenger car segment of Tata Motors Going ahead the company has plans to launch at least two new vehicles every year till 2020 New platform launch in 2017 can be a big trigger

Muted trends in pass car industry Tata Motors losing market share

‐10%

‐5%

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500,000

1,000,000

1,500,000

2,000,000

2,500,000

FY03

FY04

FY05

FY06

FY07

FY08

FY09

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FY11

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FY14

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Pass car yoy

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

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50,000

100,000

150,000

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FY03

FY04

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FY06

FY07

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Tata Motors Market share


UVs showing flattish trend Sharp loss in market share

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Uvs yoy

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Tata Motors Market share


Tata Motors

13

Operating margins to see substantial improvement Operating margins in the domestic business have been weak in H2 FY14 and FY15. This was mainly on the back of weak volume trends leading to under utilization of assets. Going ahead, we see multiple triggers for margins to improve 1) higher volumes will translate into benefits of operating leverage, 2) lower commodity prices will fuel gross margins, and 3) demand recovery in CVs will result in lower discounts. We expect the standalone operating margins to improve from a negative 3.4% in FY15 to 6.6% in FY18.

Investments to fructify over the medium term, B/S to improve Poor operational performance in the past couple of years along with high investments in capex has translated into weak operational cash flows for the standalone entity. Dividend from JLR has been a saving grace. Resultantly D/E has surged to 1.4x in FY15 from 0.8x in FY14. Going ahead, the company will continue to spend Rs3,500crs per annum for the next couple of years mainly towards product development. With improvement in operating margins and strong volume growth, we expect the operational cash flows to improve in the near term. Recent rights issue of Rs7,500crs will provide further support to the balance sheet.

Benefits of operating leverage and lower commodity prices can be a big driving force for operating margins

Trend in OPM for Tata Motors Standalone Breakeven levels for various segments

(12.0)

(10.0)

(8.0)

(6.0)

(4.0)

(2.0)

‐

2.0

4.0

6.0

8.0

Q1 FY13

Q2 FY13

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

Q4 FY15

Q1 FY16

%

25‐30%

30‐40%

60‐65%55‐60%

50%

60‐65%

0%

10%

20%

30%

40%

50%

60%

70%

Pass cars LCV M&HCV

Current utilization Breakeven point


Tata Motors

14

Tata Motors Standalone Volume assumptions FY12 FY13 FY14 FY15 FY16E FY17E FY18E Domestic

M& HCV 207,014 143,381 110,187 127,011 165,114 194,835 229,905

yoy growth 7.7 ‐30.7 ‐23.2 15.3 30.0 18.0 18.0

LCV 322,970 393,762 268,057 191,131 181,574 208,811 240,132

yoy growth 26.8 21.9 ‐31.9 ‐28.7 ‐5.0 15.0 15.0

UTILITY 55,744 47,454 31,268 24,609 25,839 29,715 34,173

yoy growth 31.8 ‐14.9 ‐34.1 ‐21.3 5.0 15.0 15.0

CARS 257,966 174,692 107,187 109,470 142,311 163,658 188,206

yoy growth 0.7 ‐32.3 ‐38.6 2.1 30.0 15.0 15.0

Total 843,694 759,289 516,699 452,221 514,839 597,019 692,416

yoy growth 13.2 ‐10.0 ‐31.9 ‐12.5 13.8 16.0 16.0

Exports

M& HCV 14,284 9,124 12,311 15,726 17,299 19,028 20,931

yoy growth ‐17.9 ‐36.1 34.9 27.7 10.0 10.0 10.0

LCV 40,786 34,881 30,742 30,687 33,756 37,131 40,844

yoy growth 24.3 ‐14.5 ‐11.9 ‐0.2 10.0 10.0 10.0

UTILITY 720 1,163 1,132 1,008 1,109 1,220 1,342

yoy growth ‐6.0 61.5 ‐2.7 ‐11.0 10.0 10.0 10.0

CARS 7,288 5,663 5,707 2,512 2,763 3,040 3,343

yoy growth 3.0 ‐22.3 0.8 ‐56.0 10.0 10.0 10.0

Total 63,078 50,831 49,892 49,933 54,926 60,419 66,461

yoy growth 8.7 ‐19.4 ‐1.8 0.1 10.0 10.0 10.0

Total sales 906,772 810,120 566,591 502,154 569,766 657,437 758,877

yoy growth 12.9% ‐10.7% ‐30.1% ‐11.4% 13.5% 15.4% 15.4% Source: Company, India Infoline Research

Tata Motors

15

Valuations at substantial discount to peers, Recommend BUY Tata Motors stock price has nosedived 55% since February 2015 and has underperformed Sensex by a massive 44%. The key reason has been the slowdown in Chinese demand. Other premium car manufacturers such as BMW, Daimler and Volkswagen (leave apart the recent emission issue) too have corrected but Tata Motors have underperformed its peers as well. Also, its trading relatively at lower P/E multiples. Considering absolute valutations as well, the stock is trading below its historic average multiples. We recommend BUY with a 1‐year price target of Rs480 an upside of 62.7%.

SOTP Valuations Rs/share

Standalone 67

JLR 427

Net automotive debt (34)

Other subsidiaries 24

Total 480

CMP 295

Upside 62.7% Source: Company, India Infoline Research

Sharp underperformance to other global premium car players

Valuations (1‐year forward P/E) at a steep discount to peers

0

20

40

60

80

100

120

140

160

Jan‐15

Feb‐15

Mar‐15

Apr‐15

May‐15

Jun‐15

Jul‐15

Aug‐15

Sep‐15

Oct‐15

Tata Motors BMW Volkswagen Daimler

8.7

7.2

8.2

5.0

‐

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2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

BMW Volkswagen Daimler Tata Motors

Source: Bloomberg, Company, India Infoline Research

Trading at lower end of historic 1‐year forward P/E multiples

1‐year forward P/E multiples below historic averages

0

100

200

300

400

500

600

700

800

900

1,000

Apr‐09

Apr‐10

Apr‐11

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Apr‐13

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Apr‐15

CMP 4x 7x 10x 13x 16x

0

2

4

6

8

10

12

14

16

18

Apr‐09

Apr‐10

Apr‐11

Apr‐12

Apr‐13

Apr‐14

Apr‐15

P/E 2 sd ‐ 1 sd ‐ Avg 1 sd + 2 sd +

Source: Bloomberg, Company, India Infoline Research

Tata Motors

16

Financials Income statement Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Revenue 262,796 279,910 312,853 332,474

Operating profit 39,239 38,840 47,452 50,992

Depreciation (13,389) (16,050) (18,352) (20,650)

Interest expense (4,861) (5,838) (5,623) (5,623)

Other income 899 966 1,039 1,117

Profit before tax 21,887 17,919 24,515 25,835

Taxes (7,643) (6,229) (7,354) (7,466)

Minorities and other (73) 250 1,350 1,750

Adj. profit 14,171 11,940 18,512 20,119

Exceptional items (185) 0 0 0

Net profit 13,986 11,940 18,512 20,119

Balance sheet Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Equity capital 644 679 679 679

Reserves 55,618 73,524 90,547 109,178

Net worth 56,262 74,203 91,226 109,857

Minority interest 433 448 463 478

Debt 73,610 70,310 67,010 63,710

Def tax liab (net) (1,390) (1,390) (1,390) (1,390)

Total liabilities 128,916 143,572 157,310 172,656

Fixed assets 117,120 135,217 151,865 166,214

Investments 15,337 15,337 15,337 15,337

Net working capital (35,656) (32,931) (38,273) (40,028)

Inventories 29,272 31,179 34,848 37,034

Sundry debtors 12,579 13,398 14,975 15,914

Other curr assets 29,501 32,071 34,897 38,006

Sundry creditors (57,407) (61,146) (68,342) (72,628)

Other curr liabilities (49,602) (48,433) (54,651) (58,354)

Cash 32,116 25,950 28,381 31,133

Total assets 128,916 143,572 157,310 172,656

Cash flow statement Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Profit before tax 21,887 17,919 24,515 25,835

Depreciation 13,389 16,050 18,352 20,650

Tax paid (7,643) (6,229) (7,354) (7,466)

Working capital ∆ 18,795 (2,725) 5,341 1,756

Other operating items

Operating cashflow 46,428 25,014 40,855 40,776

Capital expenditure (28,154) (34,147) (35,000) (35,000)

Free cash flow 18,274 (9,133) 5,855 5,776

Equity raised (21,839) 7,490 ‐ ‐

Investments (4,650) ‐ ‐ ‐

Debt financing/ disposal

12,968 (3,300) (3,300) (3,300)

Dividends paid (1,489) (1,489) (1,489) (1,489)

Other items (861) 265 1,365 1,765

Net ∆ in cash 2,404 (6,166) 2,431 2,752

Key ratios Y/e 31 Mar FY15 FY16E FY17E FY18E

Growth matrix (%)

Revenue growth 12.9 6.5 11.8 6.3

Op profit growth 12.6 (1.0) 22.2 7.5

EBIT growth 8.8 (11.2) 26.9 4.4

Net profit growth (5.4) (15.7) 55.0 8.7

Profitability ratios (%)

OPM 14.9 13.9 15.2 15.3

EBIT margin 10.2 8.5 9.6 9.5

Net profit margin 5.4 4.3 5.9 6.1

RoCE 21.0 17.4 20.0 19.1

RoNW 23.3 18.3 22.4 20.0

RoA 6.2 4.9 6.9 6.9

Per share ratios

EPS 44.0 35.2 54.5 59.2

Dividend per share 4.6 4.4 4.4 4.4

Cash EPS 85.6 82.4 108.6 120.1

Book value per share 174.8 218.5 268.6 323.5

Valuation ratios (x)

P/E 6.7 8.3 5.4 4.9

P/CEPS 3.4 3.6 2.7 2.4

P/B 1.7 1.3 1.1 0.9

EV/EBIDTA 3.5 3.7 2.9 2.6

Payout (%)

Dividend payout 10.5 12.5 8.0 7.4

Tax payout 34.9 34.8 30.0 28.9

Liquidity ratios

Debtor days 17 17 17 17

Inventory days 41 41 41 41

Creditor days 80 80 80 80

Leverage ratios

Interest coverage 5.5 4.1 5.4 5.6

Net debt / equity 0.7 0.6 0.4 0.3

Net debt / op. profit 1.1 1.1 0.8 0.6

Du‐Pont Analysis FY15 FY16E FY17E FY18E

Tax burden (x) 0.65 0.67 0.76 0.78

Interest burden (x) 0.82 0.75 0.81 0.82

EBIT margin (x) 0.10 0.08 0.10 0.09

Asset turnover (x) 1.16 1.14 1.17 1.14

Financial leverage (x) 3.72 3.75 3.22 2.90

RoE (%) 23.3 18.3 22.4 20.0

17

‘Best Broker of the Year’ – by Zee Business for contribution to brokingNirmal Jain, Chairman, IIFL, received the award for The Best Broker of the Year (for contribution to broking in India) at India's Best Market Analyst Awards 2014 organised by the Zee Business in Mumbai. The award was presented by the guest of Honour Amit Shah, president of the Bharatiya Janata Party and Piyush Goel, Minister of state with independent charge for power, coal new and renewable energy.

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