Initiating coverage tata motors ltd

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

 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.


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

Jaguar Land Rover



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 Rover's 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


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 Runner


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


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.


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


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



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

 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.


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)


Tata Motors product portfolio vis-à-vis competition
Tata Motors Piaggio Ashok Leyland Force Motors M&M
Ape Ape Trump 15, Maximmo
Products Ace, Ace Zip, Magic Super Ace Truck Mini Dost Trump 40 , Gio
Capacity (in tonnes) 0.5-1 1.2 0.8 0.5 1.25 0.8/ 1.1 0.8/0.5
Price (in lacs) 1.9-3 .0 3.7-4.0 2.25 1.75 3.6-4.7 2.7-3 3
Source; 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.


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


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.


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)


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%

-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


 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%
Maruti Hyundai Ford Honda Tata Motors
es
PV Volumes % growth yoy (RHS)


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.


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


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


 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


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


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.


 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


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.


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

Revenue PAT (RHS)



 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)


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.


 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


 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)


 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.


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


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Initiating coverage tata motors ltd

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