Tata Motors reported robust FY10 results, supported by solid performance by Jaguar Land Rover (JLR). We maintain our outperform rating as we believe that the domestic commercial vehicle business remains on a strong footing and the recovery process at JLR is sustainable.

Supported by a recovery in volumes in the domestic business and at JLR, Tata Motors reported consolidated net sales of Rs 919 bn (up 31% year-on-year) for FY10. The earnings before interest, taxes, depreciation and amortisation (Ebitda) margin improved significantly to 9.4%, around 140 basis points ahead of our estimate. Consolidated profit after tax (PAT), post-minority interest and adjustments for exceptional, at Rs 11.6 bn, was largely in line with our estimate. For 4Q in particular, the standalone margin came in at 11.7%, down 70 bp quarter-on-quarter (QoQ) and about 100 bps lower than estimated, mainly on higher other expenditure.

JLR reported better better-than-expected net profit of ?72m for Q4 and turned positive on the net profit level for the full year. The Ebitda margin in Q4 came in at 11.4%, compared with 9.8% in the last quarter. Apart from the various cost-reduction initiatives being undertaken by the company, around 4% improvement in realisations led to the improvement in margins. With the management?s focus on reducing the break-even point and on new product development, we expect the strong performance to continue.

Leverage down significantly: Tata Motors’ net automotive debt stood reduced at Rs 188 bn as of March 2010, from Rs 231 bn as of December 2009. The net debt-to-equity now stands at 2.05:1, down from 4.3:1 1, as the company raised funds through divestment of stakes in subsidiaries, fresh capital issue and an improved working capital position. We expect the deleveraging process to continue and management targets to bring the net debt below equity.

Earnings and target price revision: Reduced standalone earnings by 6-7%, mainly on account of recent dilution. Increased target price to Rs 920 from Rs 885 on account of improved performance at JLR and reduced debt levels.

Price catalyst: The 12-month price target of Rs 920 is based on a sum-of-parts methodology. The catalyst is the improving domestic and JLR sales and quarterly numbers. Tata Motors has benefitted significantly from the revival in sales in the domestic and developed markets on the back of a macroeconomic recovery over the last couple of quarters, and we expect the trend to continue. Aggressive cost-cutting measures being undertaken at JLR should further aid earnings growth over the next couple of years.

Takeaways from concall: JLR?s realisations improved as its average realisations turned out to be up by about 4% QoQ after 8% improvement in the last quarter, supported by a better model and country mix and the gradual decline in incentives over quarters.

The company has annual raw material contracts from July to June. JLR currently sources about 20% of components from low-cost countries, up from 16%, and targets to increase this to around 30%. It has opened purchasing offices in China in 2009.

Financing arrangements: The company has entered into financing arrangements with Chase for the US market and with Fiat?s financing arm for the UK and European markets. The business has a negative working capital need.

Importance of China: Total sales in China now account for about 10% of JLR, and the company plans to increase sales to around 25,000 units in coming years. For this, the company plans to establish a separate national sales company in China in 2010.

Capex: The annual capex for the standalone business is likely to be around Rs 30 bn. JLR’s annual R&D and capex spend is expected to be around ?600 m.

While there has been some slowdown in showroom traffic in Europe, JLR has seen improvement in the UK, the US, China and the Middle East. The company also has a decent order backlog and remains confident of improving volumes in the coming year barring a double-dip in the global economy. Further on currency impact, JLR is a net receiver of dollars, and euro remains a net outflow. Thus, currency movement has been positive for the company for the last few quarters, with forex gains standing at ?10-15 m.

?Macquarie Equities Research