Tata Motors maintains JLR volume guidance at 360,000 units for FY13, with 100,000 units of Evoque and 5-7% growth in non-Evoque portfolio. The recent disappointment in JLR monthly volumes has been largely due to slower than anticipated ramp-up of the new Range Rover (RR) resulting in production loss of 20,000 units since August. The company expects production to ramp up from December.
JLR has multiple levers to improve its sustainable margins over the next 2-3 years. The new RR would be accretive at both the Ebitda (earnings before interest, taxes, depreciation and amortisation) and PAT (profit after tax) levels the benefits would be fully reflected in FY14. As it fully executes its modular platform strategytwo models per platform by 2016 from 1.28x currently, sustainable margins would expand by 150-200bp. Further, over the next 2-3 years, its captive engine initiative and Chery JV (China) would help reduce costs.
As the new RR is built on an entirely aluminum platform (against 50% steel and 50% aluminum earlier), the company has replaced one-third of the Solihul plant entirely with new machinery. However, given the new assembly line, different production processes and consequent employee training involved, production transition from old to new RR has been slower than anticipated. As a result, wholesale dispatches of RR have been impacted by 20,000 since Aug 2012.
However, management expects production of the new RR to normalise this month with higher dispatches. Retail sales of the new RR would start in Q4FY13. JLR has so far received over 7.5k bookings for the new RR (ex-US and China) with average waiting period of 3-4 months depending on markets, despite the launch being restricted to a few markets initially. By Jan 2013, the product shall be available in all markets. As the new RR is being launched after a gap of 10 years (against average product life cycle of 7 years), management estimates pent-up demand for the product to drive volumes.
India business continues to be under pressure (except LCVs). While there are no visible signs of improvement for MHCVs, discounts have reduced MoM (month-on-month) since September 2012. LCV growth remains robust, with no major threat to margins over the near to medium term. The domestic passenger car business continues to struggle, with lower capacity utilisation, higher discounts and ad spends.
We are cutting our EPS estimates for FY13/FY14 by 2%/3.4% to R32.5/R39.3, building in slower ramp-up of the new RR and continued weakness in the domestic business. However, the impact is diluted by lower than expected depreciation and amortisation on the new RR. The stock trades at 8.5x(times) FY13e and 7.0x FY14e consolidated EPS. Maintain Buy with a revised target price of R325.