'Overweight' ratings on Tata Motors Ltd shares, Product mix drives beat: Morgan Stanley

Updated: Feb 17 2014, 16:08pm hrs
Quick comment-solid quarter: Despite intense currency headwinds, JLR posted strong operating performance as Ebitda (earnings before interest, taxes, depreciation and amortisation) grew by 65%y-o-y (year on year) on traction from high-margin models like Tata Motors' Range Rover. We rate the stock Overweight on strong demand momentum and attractive valuations.

Consolidated performance JLR beats and India misses: Consolidated Ebitda came in at Rs 106 bn, up 72% y-o-y (year on year) and 33% ahead of expectations. JLR contributed about 103% to the group Ebitda and was the key driver for the beat.

JLR: The companys top line, Ebitda and net income grew by 40%y-o-y, 65% y-o-y and 152%.

y-o-y respectively. Ebitda margins went to 17.9% despite a 140 bps adverse currency headwind as mix shifted towards high-margin models like Range Rover and leverage gains kicked in, as JLR facilities are running at full capacity. These high margins wont be sustained, as new lower-ASP models gain share in FY15 but strong beat improves visibility of our 16.5% FY15 Ebitda margin assumption.

India business Going deeper into losses: Ebitda was R3.4 bn loss vs. MSe of R755 m gain; rising marketing spend and inflationary cost pressures were the key reasons for earnings miss.

Valuation attractive: JLRs Ebitda margin came in at 17.9% but is probably not sustainable, as mix will likely change. However, this beat improves visibility of our 16.5% FY15 margin assumption. We find valuation attractive at 8.6x FY15e (estimates) adjusted earnings vs. peers like BMW, which trade at 10.1x 2014e.

Mix and leverage more than offset currency headwinds product mix was favourable as Range Rover and Sport accounted for 31% of sales in FYQ314 vs. 23% in FYQ214. Given their recent launch, most of the sales seen in these models were of higher derivatives, which carry better margins. On the conference call, the company added that momentum across these two models remains strong, though over the next few quarters, the mix could deteriorate as consumers shift to low-end versions.

Leverage gains kick in: Given a 14% q-o-q jump in volumes and with Land Rover running at full utilisation rates, the leverage gains kicked in, thus supporting margin expansion. The company targets to take capacity to 500k/520k (from current 450k) by the end of FY15 and further scale it up to 650k/700k by FY17/18.

Currency is the key headwind: JLR is a UK-based exporter, so strong GBP is a headwind. The GBP has depreciated 4% against the USD in FYQ314, thus eroding 200m on the top line, 116m at Ebitda level and 140 bps of the margin.

Capex: No change in stance

Standalone: The company maintained its guidance of R30 bn in annual capex in the next few years, mainly for product development, new technologies and new product offerings.

JLR: The company mentioned that its capex guidance for FY14 and FY15 remains intact at GBP 2.75 bn and 3.5-3.75 bn, respectively. Capex will be focused on new product development and expansion of capacity. It stated that it would maintain similar levels of capex beyond FY16, even as it spends 2-3% more on sales than its peers do.

Debt-to-equity ratio improves: Net automotive debt at the consolidated level was R118 bn (versus R140 bn in Q2) and R165 bn (versus R190 bn) at the standalone level. Net debt/equity ratio at the consolidated level was 0.19x and at the standalone level was 0.8x (versus 0.26x at consolidated level and 0.96x at standalone level as of September 2013). JLR generated FCF (free cash flow) of 234 m during the quarter.