Jaguar Land Rover (JLR) profitability set to accelerate: We have been cautious on Tata Motors shares primarily on account of: (i) Jaguar Land Rover being susceptible to cash flow vulnerability given the elevated levels of capital expenditure and uncertainty over demand and pricing trends; and (ii) worries over the standalone operations given macro concerns and corresponding weakness in volumes, which have resulted in large losses over the last three quarters. As a result, Tata Motors has performed in-line with the Nifty (YTD) and consensus earnings have been lowered by 11% for FY14e (estimates) and 6% for FY15e during the same time.
In our view, while concerns on the standalone operations persist, Jaguar Land Rover has shown better-than-expected volume and pricing performance with stability in end-market demand. Additionally, with platform consolidation benefits yet to be had, we expect profitability (Ebit margins) to expand 165bps in FY13-16e, thus resulting in positive free-cash generation (pre working capital changes). Overall, we raise our PT (price target) by 39% to Rs 368 and upgrade the stock to Overweight on relatively higher visibility in earnings (vs other coverage OEMs—original equipment manufacturers—that remain prone to domestic macro weakness) along with near-term margin improvement triggers in place.
Volume and product mix strong for Jaguar Land Rover: With a strong pipeline of products, we expect Jaguar Land Rover to outpace its industry peers with a volume CAGR (compound annual growth rate) of 10% from FY13-16e (vs 5% for peer set, namely BMW, Audi and Daimler). Additionally, recovery in key markets of the US and Europe along with increased penetration in China (targeting 200 distributors by FY15e vs 135 currently) is expected to keep pricing trends intact for Jaguar Land Rover.
Jaguar Land Rover’s Ebit margin set to expand by 165bps in FY13-16e: We expect Ebit (earnings before interest and taxes) margins (adjusted for accounting policies) to expand from 8.8% in FY13 to 10.4% in FY16e. The key driver for this will be platform consolidation and an eventual move to a modular design platform (expected in FY15/16). Jaguar Land Rover is in the process of consolidating its platforms from nine in FY12 to six in FY16e, while increasing the number of products from 9 to 15 during the same time. Platform consolidation should augur 200bps of profitability improvement for Jaguar Land Rover from FY13-16e. Arguably, Jaguar Land Rover has a historically