We are increasing our FY17/18 EBITDA and EPS forecasts for Tata Motors by 7/10% and 17/20% to factor in our expectations of a weaker £. The £/$ rate has depreciated 8% in three months and Deutsche Bank forecasts a rate of 1.28 by Dec-16 and 1.15 by Dec-17 compared to spot rate of 1.39. On an un-hedged basis and ignoring cross-currency impact, a 1% depreciation in the £ would lead to a 2.5-3% increase in EBITDA and 5-6% increase in EPS for Tata Motors.
Consequent to the earnings changes, we are increasing our target price by 8% to `325. While the currency tailwinds are positive, our cautious stance is driven by concerns on pricing and a deteriorating product mix in the global car business.
Tata Motors’ global car business (£-denominated) contributes around 75/85/100% to consolidated revenue/EBITDA/PAT. Aro-und 40% of global revenues are denominated in $ while 20% are denominated in yuan. The revenue exposure to EUR (c20%) is largely offset by component imports. Hence, any depreciation of the £ vs. $ is a positive for the global car business.
While the £ is depreciating against the $, this is being accompanied by a similar trend in the yuan and euro. Also, since Tata Motors’ reporting currency is `, there is downward pressure with translation as the ` has remained relatively resilient.
We understand that Tata Motors hedges 65-85% of its FX exposure one year out, 45-65% two years out, 25-65% three years out, etc. This implies a much smaller immediate impact on the P/L compared to the actual currency move. Our forecast changes take into account cross-currency, translation losses and the impact of hedging.