We upgrade Tata Motors to ?buy? from ?neutral?, primarily on sustainable growth in JLR, which is the prime driver of stock valuations.
Although India business remains uncertain, we could be near trough across key operating segments. We also retain our ?buy? rating on Class A shares ? DVRs due to compelling valuations at 44% discount to ordinary shares. We raise our price objective by 26% to R360, solely driven by JLR, reflected in an increase in profit forecasts by 15-25% on better sales mix.
We retain EV/Ebitda as primary valuation tool for Tata Motors, most suited to even out volatility of highly cyclical business constituents. Our sum-of-the-parts-based price objective of R360 values JLR at 4x, a 20% growth premium (30% Ebitda CAGR) over imputed multiple of global peers (10% CAGR), and India business at 7.5x, similar to historical average during early stages of the recovery cycle.
Over the past year, Tata Motors has been one of the stronger performers compared to the broader market, but only slightly better than four-wheeler autos. Despite this, we rate Tata Motors as one of our key picks in autos over next 12 months because the deliverables seem sustainable and valuations are still attractive.
Despite falling short of expectations in H1FY13 (1,61,000 units), we expect JLR to meet full-year sales expectations of 3,63,000 units (up 15.5%) and sustain similar momentum over the forecast period. This will be driven by a slew of new products with far more market potential and improved pricing than expected earlier.
Over the past decade, the global luxury car market has grown slightly ahead of the overall car market. Over the past three years, the differential has widened with luxury cars well ahead at 13% CAGR versus global cars at 9% CAGR. We expect this structural trend to continue. JLR sales grew 27% annually during this period, yet luxury car market share remains miniscule at ~4%.
India business is seeing a downturn, but is closer to the trough. Although near-term outlook seems uncertain, prompting a sharp cut in core profit forecasts, M/HCV (i.e. truck/bus), which is the key contributor, could be closer to trough. LCV is growing ahead of peers and utility vehicle is piggy-backing on structural uptrend.
BofA ML
