Tata Motors downgraded to Hold

Updated: Jun 30 2012, 07:35am hrs
JLR has benefited from a fortuitous combination of strong demand, strong pricing, superior mix and controlled investments. We see increasing adverse risk to all these factors especially to demand strength and extraordinary pricing power in China. Near-term product mix is likely to weaken while investments are being stepped up. The slowdown in the domestic CV market could put further pressure on cash flows. We cut our rating to Hold Anecdotal evidence suggests that the premiums paid by Chinese consumers (relative to prices in developed markets) have started coming off but so far has impacted only the dealer margins. Incrementally, we believe the risk to premiums and OEs realisation is on the downside. Constrained supply has been another reason for strong pricing. Premium car manufacturers were very conservative in increasing capacity for most of CY09-11. However, the current stretched supply chain is forcing OEs to invest in new capacity. While this will likely not result in immediate pricing pressure, the direction on supply is upwards.

JLRs product mix is likely to deteriorate in FY13, as bulk of incremental volumes will likely come from models with lower ASPs. The variant mix of Evoque will likely stabilise at 4Q12 levels (much poorer than the mix in 3QFY12), higher capacity at Halewood plant will result in higher production of Freelander, higher production of Jaguar XF as JLR is also likely to have planned better for engine supplies. Hence, we cut our assumptions for JLRs ASPs by c3% on avg in FY13/14E.

The domestic truck market is showing incipient signs of a downturn. The final excise duty increase was higher than expected and this has added further pressures to the near term volumes. We see downside risks to the cycle on account of the slowing domestic economy as well as slowing international trade flows, and cut our volume estimates for trucks by c5% in FY13/14E.

We cut our target multiple for JLR from 3x to 2.5x FY14E Ebitda, reflecting the fall in luxury car valuations; and for the standalone business to 6x (from 7x) FY14E Ebitda. While TTMT looks cheap on conventional valuation matrices, earnings based multiples can be misleading at this stage of the cycle.