We reiterate 'overweight' on Tata Motors shares, with target price raised to Rs 445 (from Rs 358).
Our takeaways from recent interaction with European Jaguar dealers indicates brand perception and brand acceptance are improving. Even among European drivers, Jaguar is emerging as a credible alternative to the top-three German names.
This bodes well for the brands outlook, in particular the success of the smaller Jaguar model due for launch next year could keep volume growth and sentiment buoyant in FY15-16e. As for Land Rover, volume growth estimates for FY15-16e look achievable, supported by the new Freelander and the full year impact of RR Sports. We expect Jaguar Land Rover volumes to grow at a 14% CAGR in FY13-16e, with JLRs share of the luxury market expanding to 6.3% in FY16e from 4.8% in FY13.
Jaguar Land Rovers margins are currently lower than BMWs. This is despite JLRs much higher product margin score. The lower profitability at Jaguar Land Rover could be partially attributed to BMWs scale economies.
Although Jaguar has lower margins than Land Rover, an increasing Jaguar contribution to sales may not necessarily dilute Jaguar Land Rover margins, as Jaguars high operating leverage indicates its profitability should improve with sales. On the back of a stable margin, we estimate Ebitda to grow at a 15% CAGR in FY14-16e.