We upgrade Tata Motors to ‘buy’ (earlier ‘hold’) with a target price of R400 (earlier R275). We value the stock based on sum-of-the-parts (SoTP) valuations, with the JLR and the India business pegged at R338 and R52, respectively. The financing business is valued at R10 per share. The increase is driven by 1) 14.3% and 11.2% increases in FY15e and FY16e EPS, respectively; 2) a 25% increase in valuation, in line with the expansion in valuation multiples for automotive peers.
China and the US, which account for 45% of Jaguar LandRover’s volumes, have been particularly robust. For JLR, this has echoed in falling incentives, volume momentum and robust margins. Our target price implies FY15e EV/Ebitda of 7.5x for India business and 3.8x for JLR. The valuation for JLR is in line with BMW (3.5x CY14e), adjusting for differences in R&D accounting.
Deutsche China economist Jun Ma is increasingly constructive on China GDP —he now projects 8.6% and 8.2% GDP growth for CY14e and CY15e. We expect US GDP growth to improve from 1.8% in CY13 to 3.2% and 3.5% in CY14e and CY15e. For JLR, we forecast FY14e, FY15e, and FY16e volumes at 4.2 lakhs, 4.62 lakhs, and 5.38 lakhs, respectively, implying a three-year CAGR of 13%. YTD, JLR volumes have grown 17%, driven by the US (20%) and China (22%). We expect stable margins in the medium term and a fall in FY16e on account the introduction of the smaller Jaguar.
We expect Tata Motors to generate an Ebitda of R47 billion in FY16e, in line with its previous peak in FY11. While the car and UV businesses are likely to remain under pressure, we expect a revival for CVs in FY15e.