Initiating coverage tata motors ltd

TATA MOTORS Ltd.

BUY

- 1 of 22- Wednesday 18th Jan, 2012

This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.

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OIN

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Target Price `262 CMP `214 FY13 PE 5.9x

Index Details We initiate coverage on Tata Motors (TML) as a BUY with a sum of the parts (SOTP) valuation based Price Objective of `262. At a CMP of `214 the stock is trading at 6.3x and 5.9x its estimated earnings for FY2012E & FY2013E representing a potential upside of 22.4% over a period of 12 months. Robust growth of the JLR business (62% of FY13 revenues) is expected to be the key trigger through continuous unveiling of new products and well diversified geographical reach in over ~170 countries. In addition, strong performance & sustained leadership in the domestic CV segment and gradual momentum in the passenger vehicle is expected to drive the standalone business. Accordingly, consolidated revenues and earnings are expected to grow to `1,87,047 crore (23.2% CAGR) and `11,413 crore (11% CAGR) respectively over the period FY12-13.

JLR’s strong growth momentum to continue Despite the muted performance of Jaguar sales, we expect JLR volumes to post a CAGR of 17.1% over FY12-13 to ~3,34,000 units aided by the encouraging response to the recently launched Range Rover Evoque, and brisk sales of existing Land Rover models. Additionally, the catapulting demand from fast growing markets like China, Russia and RoW will keep it insulated from the slowdown in UK, continental Europe and static growth in the US. Further plans to launch 40 new models and variants over the next 5 years should help keep the portfolio of brands fresh, invigorated and drive growth.

CV sales growth to be led by SCV/LCV M&HCV sales have experienced muted growth of 9.4% in YTD FY12. Bus volumes too have also been impacted in absence of any new orders under JNNURM. However, LCV’s (+25.5% growth YTD) have managed to buck the trend and continue to grow driven by strong consumption and replacement demand from three wheelers. We believe that the interest rate cycle has peaked and with inflation coming under control, there is a strong possibility of reversal in the interest rates which should lead to resurgence in M&HCV volumes over the medium term. Consequently, we expect the segment to report 16% CAGR over FY12-13 to ~5,90,000 units partially aided by strong demand of the ACE/Magic family.

Sensex 16,452

Nifty 4,956

BSE 100 8,523

Industry CV & PV

Scrip Details

Mkt Cap (` cr) 57,543

BVPS (`) 82.1

O/sShares (Cr)

269.1

AvgVol (Lacs) 23.3

52 Wk H/L 260/138

Div Yield (%) 1.8

FVPS (`) 2.0

Shareholding Pattern

Shareholders %

Promoters 35.1

DIIs 14.6

FIIs 24.2

Public 26.1

Total 100

TTMT vs. Sensex

Key Financials (` in Cr)

Y/E Mar Net

Revenue EBITDA PAT EPS

EPS Growth (%)

RONW (%)

ROCE (%)

P/E (X) EV/ EBITDA(X)

2010 92519.3 7010.9 2571.1 8.1 - 30.7 22.0 26.4 12.8

82011 123133.3 16514.5 9273.6 29.2 260.7 48.1 32.6 7.3 5.4

2012E 152787.6 19887.2 10847.2 34.2 17.0 37.8 27.6 6.3 4.5

2013E 187040.7 21517.2 11413.2 36.0 5.2 29.4 26.9 5.9 4.2

- 2 of 22 - Wednesday 18th Jan, 2012


Passenger Vehicle demand to remain subdued

While the growth of PV sales is expected to remain subdued over FY12-13, the faster increases in the petrol prices (~+12% since January’11) than diesel (~+9% since January’12) has led to relatively attractive pricing of diesel cars. This is especially beneficial for diesel engine based car manufacturers like Tata Motors (which is also visible from the sharp uptick in the December monthly volume sales). In addition, positive response from the new Indica Vista, revamped Indigo, improved model of Nano - Tata Nano 2012 and soon to be launched diesel version of Tata Nano are expected to sustain the volumes going forward. However, given the poor showing of -0.7% YTD on the back of increasing competition and unfavorable economic scenario in the near to medium term, we expect the passenger vehicle segment volumes to experience muted growth of 2% CAGR to ~3,08,000 units by FY13.

Subsidiaries on the growth path

Other subsidiaries like Tata Daewoo Limited, Tata Motors Finance Ltd. (TMFL) and Tata Technologies are also expected to contribute to the growth story. We expect the 2nd largest truck manufacturer in South Korea’s-Tata Daewoo’s revenues and earnings to grow at a CAGR of 24% and 10% to `4,476 crore and `89 crore respectively over FY12-13. TMFL, the financing arm of Tata Motors Ltd is in good stead to benefit from improving volumes of TML. TMFL revenues and earnings are expected to post a CAGR of 26% and 36% to `2,159 crore and `237 crore respectively over FY12-13. Tata Technologies

revenues are expected to grow at a CAGR of 8.5% and earnings to remain flat at `1,470 crore and `133 crore respectively over FY12-13 on account of global exposure.

Attractive Valuations

We value the diversified Tata Motors on SOTP basis at `262 per share representing an upside potential of 22.4% from the CMP of `214. The strong growth of the JLR brands,

expected resurgence of M&HCV sales and relative better showing of its PV diesel portfolio compared to peers should stand the company in good stead.

SOTP Valuation Assumptions

Company FY 13 EPS Multiple Measure Value per share

Tata Motors Standalone 4.3 10.5 P/E 45.2

Jaguar Land Rover 26.7 7.5 P/E 200.3

Tata Motors Finance 7.0 (BV) 1.5 P/B 10.5

Tata Technologies 0.4 9 P/E 3.8

Tata Daewoo 0.3 9 P/E 2.5

Target Price 262.3



Company Background

Established in 1945, Tata Motors is now India’s largest automobile company, and is the leader in the commercial vehicle segment. It is predominantly engaged in the manufacture of CV, passenger cars and utility vehicles. Through its subsidiaries and associate companies, it is also engaged in the manufacturing of engineering and automotive solutions, construction equipment and supply chain activities. The acquisition of UK based Jaguar Land Rover has helped Tata Motors foray into international markets and the iconic brands of Jaguar and Land Rover have become the key drivers of future growth.

JLR’s strong growth momentum to continue

Despite the muted performance of Jaguar sales, we expect JLR volumes to post a CAGR of 17.1% over FY12-13 to ~3,34,000 units aided by the encouraging response to the recently launched Range Rover Evoque, and brisk sales of existing Land Rover models. Additionally, the catapulting demand from fast growing markets like China, Russia and RoW will keep it insulated from the slowdown in UK, continental Europe and static growth in the US. Further, plans to launch 40 new models and variants over the next 5 years should help keep the portfolio of brands fresh, invigorated and drive growth. We expect JLR earnings to post a CAGR of 24% to GBP 15.1 bn and earnings to grow at a CAGR of ~4% to GBP 1.1 bn by FY13.

Organisation Structure along with Revenue share (%)

Tata Motors Ltd.

Tata Motors (Standalone)

(38.7%)

Jaguar Land Rover

(56%)

Tata Daewoo

(2.3%)

Tata Motors Finance

(1.1%)

Tata Technology

(1%)

Others

(0.9%)

Source: Tata Motors



Land Rover to spearhead sales

Since the takeover of ailing JLR in 2008, the Tata’s have managed to turn around and steer the former to a high growth trajectory. Volume in both retail (2,40,905 units; +16% YoY jump in FY11) as well as wholesale (2,43,621 units; +26% YoY in FY11) have grown handsomely. Despite lackluster growth in traditional markets of UK, continental Europe and USA, forays into newer geographies notably Russia, China and RoW have helped spearhead the growth. This re-shuffle of geographical market share growth has not only helped grow volumes but introduction of newer products and premium pricing has helped improve realizations. Despite the fact that Jaguar is to experience stagnant growth, overall volume growth is expected to be driven by the Land Rover range of vehicle through a strong product pipeline and presence in over 170 countries.

Revenue and PAT (GBP in mn)

-600

-400

-200

0

200

400

600

800

1000

1200

0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

14000.0

16000.0

FY09 FY10 FY11 FY12E FY13E

Revenues PAT (RHS)

Source: Tata Motors, Ventura Research Estimates

Jaguar and Land Rover Volumes

0

50000

100000

150000

200000

250000

300000


Jaguar Land Rover




Evoque platform to fill gaps in Land Rover's product portfolio

Traditionally portrayed as a large SUV player, Land Rover has recently forayed in the compact SUV segment. This new strategy has paid off well as can be observed by the encouraging response received from the recently launched Evoque (30,000 pre-bookings).

Competition to the Land Rover range

Land Rover Product Portfolio

Freelander

EvoqueDiscovery

Range Rover Sport

Range Rover

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

0 1 2 3 4 5 6


In $

Jaguar Retail Sales in H1 FY11/12 Land Rover Retail Sales in H1 FY11/12

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

UK North America

China Europe Russia Rest of World

H1 FY11 H1 FY12

0

5000

10000

15000

20000

25000

UK North America

China Europe Russia Rest of World

H1 FY11 H1 FY12



Land Rover Audi BMW Cadillac Mercedes Toyota

Range Rover/Sport Q7 X5 Escalade GL Land Cruiser

Evoque Q5 X6 SRX M Class -

Discovery Q7 X5 SRX M Class 4 Runner

Freelander Q5 X3 SRX GLk 4 Runner




The Evoque launch is not expected to cannibalize the existing products of JLR because of its positioning. Moreover, Evoque’s design innovations have helped check input costs and hence its lower price points are not expected to impact blended margins.

JLR banking heavily on Chinese demand Notwithstanding the macro headwinds in Europe and slowdown in the US, JLR continues to post strong sales performance in emerging countries like China aided by new launches and higher disposable incomes. China has turned out to be an important market for JLR’s products portfolio over the past few quarters and volumes in the first two quarters of FY12 have more than doubled. We believe that strong preference for SUVs in China would help JLR attain strong volume growth in the medium term. In July 2010, JLR has set up its own distribution company, ‘National Sales Company (NSC) which would help improve its distribution reach and bring greater focus to its China volume story. Further, to cater to the increasing demand and offer products at competitive prices JLR is in the process of setting up a manufacturing joint venture with a local partner, as the import duties for cars in China are higher as compared to other geographies. In our view, these initiatives are positive and should help Land Rover to firmly entrench itself in the world fastest growing vehicle market.

UK and Europe to witness stagnant growth

Historically, UK with a 20% revenue volume share has remained one of the major markets for JLR. However, the weakening economic scenario has impacted the sales volumes of the UK’s automobile industry. While the overall UK passenger segment de-grew by 4.5%, JLR volumes registered a fall of 5% in YTD CY11. However, Land Rover volumes witnessed a marginal fall of 0.42% to 34,890 units in YTD CY11 as compared to 35,036 units in YTD CY10. Thus, JLR has been able to sustain its market share at ~2.7% in the UK markets aided by the continuous unveiling of new models and the judicious expansion plan.

China Car Sales-Quarterly

0

2000

4000

6000

8000

10000

12000

Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12

Jaguar land Rover




JLR’s continental Europe sales lower on the back of depressed Jaguar sales

JLR (with ~1% market share in the European markets) has seen its growth (-1.4%) sliding more than the 0.8% YTD de-growth of the European PV market on account of a sharp fall in Jaguar volumes of 17%. However Land Rover volumes have witnessed a marginal growth of 4.1% and thus JLR series is expected to witness flat growth over FY12-13 on the back of incremental volumes from the Land Rover series.

Jaguar Europe Retail Sales Land Rover Europe Retail Sales

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Jan Feb March April May June July Aug Sept Oct

2010 2011

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Jan Feb March April May June July Aug Sept Oct

2010 2011



Jaguar UK Retail Sales Land Rover UK Retail Sales

0

500

1000

1500

2000

2500

3000

3500

April May June July Aug Sept Oct Nov Dec

2010 2011

0

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7000

April May June July Aug Sept Oct Nov Dec

2010 2011





New product launches to keep the portfolio invigorated

JLR plans to strengthen its business by diversifying and enhancing its product range in the premium car and SUV segments. Over the next five years, nearly 40 new product launches and variants are planned. Further JLR intends to launch a new platform every seven years with major and minor refurbishing for each model every four years and two years respectively. In line with these ambitious plans, the management has guided that it would be investing GBP 1.5 bn in fixed assets per annum over the medium term.

We believe the new product launches will augur well for JLR, since changing consumer preferences regularly shift from old models to new models in the luxury car segment on account of technological advancement.

Competition to the Jaguar Range

CV sales growth to be led by SCV/LCV sales

M&HCV sales have experienced muted 9.4% growth in YTD FY12. Bus volumes too have also been impacted in absence of any new orders under JNNURM. However, LCV’s (+25.5% growth YTD) have managed to buck the trend and continue to grow driven by strong consumption and replacement demand from three wheelers. We believe that the interest rate cycle has peaked and with inflation coming under control, there is a strong possibility of reversal in the interest rates which should lead to resurgence in M&HCV volumes over the medium term. Consequently, we expect the segment to report 16% CAGR over FY12-13 to ~5,90,000 units partially aided by strong demand of the ACE/Magic family.

LCV sales to continue the positive uptrend.

In spite of prevailing macro-economic headwinds, the LCV segment (+28% YoY growth in FY11) continues to show robust growth and has so far managed to buck the overall slowdown being witnessed in other segments. The growth has been primarily driven by the SCV segment which accounts for nearly 60% of LCV sales. Tata Motors has maintained its market share of 60% in this segment aided by strong demand for transportation of consumer goods within cities and replacement demand from three wheelers. Demand is also expected to be driven by incremental demand from Tier II and Tier III cities. TML LCV volumes witnessed a growth of 25.5% yoy to ~2,27,000 units partially attributable to the strong demand from Tata Ace/Magic family. To cater to the increasing demand for the Ace / Magic family products, the company is contemplating a brownfield expansion at its Pantnagar facility to increase the output from 3,50,000 units to 4,50,000. Further, the new LCV manufacturing facility at its existing plant in Dharwad with an initial capacity of 90,000 units p.a is on track.

Jaguar BMW Mercedes Audi Nissan Cadillac Porsche

XF Series BMW 535i Merc E350 Audi A6 Infiniti M37 Cadillac SRS -

XJ Series BMW 750i Merc S350 Audi A8 Quattro - - Panamera S

XK Series BMW 650i Merc SL 550 - - Cadillac CTS 911 Carrera




New launches and strong product offerings by competitors like Ashok Leyland (Dost) and Mahindra and Mahindra (Maximmo and Gio) are not expected to impact the positioning of TML. However, significant capacity expansions by peers like Force Motors and Ashok Leyland in the medium term can impact the market share marginally. We expect the LCV volumes to post CAGR of 22% over FY12-13. Tata Motors product portfolio vis-à-vis competition

M&HCV sales facing strong headwinds Tata Motors standalone business continues to be driven by its undisputed leadership position in the commercial vehicle segment. After registering ~30% growth in FY11, M&HCV segment witnessed severe contraction in demand in the current fiscal on account of rising interest rates and slowing industrial activity.

LCV Market Share LCV Volumes and Growth

58.3%

30.4%

3.3%4.9% 2.5%

Tata Motors Ltd. Sales M&MOthers Force Motors Ltd.Piaggio Vehicles Pvt. Ltd.

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

100000

150000

200000

250000

300000

350000

400000

FY08 FY09 FY10 FY11 FY12E FY13E

LCV Volumes % growth yoy (RHS)



Tata Motors Piaggio Ashok Leyland Force Motors M&M

Products Ace, Ace Zip, Magic Super Ace Ape

Truck Ape Mini

Dost Trump 15, Trump 40

Maximmo, Gio

Capacity (in tonnes) 0.5-1 1.2 0.8 0.5 1.25 0.8/ 1.1 0.8/0.5

Price (in lacs) 1.9-3 .0 3.7-4.0 2.25 1.75 3.6-4.7 2.7-3 3

Source; Tata Motors, Ventura Research Estimates



Additionally, the mining ban in Karnataka has also led to nearly 10,000 truck operators remaining idle in the region. This coupled with the stagnant freight rates and rising costs of vehicle ownership has led to deferment in purchases by fleet operators resulting in a slowdown in the segment. TML being the market leader in the M&HCV segment (market share 60%) was also affected, resulting in a muted growth of 8.4% in YTDFY12.

Competitive pressures building up in the bus segment. The bus segment in which TML enjoys ~40% market share has been primarily affected by abrupt freezing up of fresh orders from the public sector undertakings under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM). Tata Motors in order to expand its product portfolio has recently made a foray in the ultra luxury bus segment with the launch of Divo; pitched against its foreign rivals Daimler and Volvo which currently dominate the inter city ultra luxury coach segment. Competition is expected to intensify further in the bus segment with manufacturers like Volvo doubling capacities, new launches from Daimler and its biggest existing competitor Ashok Leyland also launching new models targeted at the BRT segment. The industry is expected to witness ~1,00,000 M&HCV capacity expansion to come on stream by FY14. However, we believe that these will not affect the leadership position enjoyed by TML.

Market Share of Various Truck Players Trucks Volumes and Growth

63%

21%

16%

Tata Motors Ltd. Ashok Leyland Ltd. Others

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

10000

30000

50000

70000

90000

110000

130000

150000

170000

190000

210000

FY06 FY07 FY08 FY09 FY10 FY11

Sales growth yoy (RHS)





With strong indications that interest rates have peaked and are expected to soften, there is a case for the industrial activity reviving leading to an uptick in the CV business. Also, steel prices (major raw material for automobiles) are expected to come down as the capacity is expected to go up by 52.8 million tonnes to 158.5 million tonnes by FY14 and the Supreme Court is expected to provide a relief to the mining ban in Karnataka which should help bring down RM costs in the near term. We expect the M&HCV volumes to post a CAGR of ~7% over FY-13 to ~2,16,000 units.

Market Share of Various Bus Players Bus Volumes and Growth

42%

42%

6%

10%

Tata Motors Ltd Ashok Leyland Ltd

S M L Isuzu Ltd Others

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

10000

12000

14000

16000

18000

20000

22000

24000

26000

28000

FY06 FY07 FY08 FY09 FY10 FY11

Buses % Growth (RHS)



M&HCV Volumes & Growth IIP and M&HCV growth

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

100000

200000

300000

400000

500000

600000

700000


M&HCV Volumes % growth yoy (RHS)

-100%

-50%

0%

50%

100%

150%

200%

250%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Ju

n, 06

Sep

, 06

Dec,

06

Mar,

07

Ju

n, 07

Sep

, 07

Dec,

07

Mar,

08

Ju

n, 08

Sep

, 08

Dec,

08

Mar,

09

Ju

n, 09

Sep

, 09

Dec,

09

Mar,

10

Ju

ne,

10

Sep

, 10

Dec,

10

Marc

h,1

1

Ju

ne,1

1

Sep

,11

Industrial Production (General) M&HCV Growth (RHS)


Source: IAS, Ventura Research Estimates



Passenger Vehicle demand to remain subdued

While the growth of PV sales is expected to remain subdued over FY12-13, the faster increases in the petrol prices (~+12% since January’11) than diesel (~+9% since January’12) has led to relatively attractive pricing of diesel cars. This is especially beneficial for diesel engine based car manufacturers like Tata Motors (which is also visible from the sharp uptick in the December monthly volume sales).

In addition, positive response from the new Indica Vista, revamped Indigo, improved model of Nano - Tata Nano 2012 and soon to be launched diesel version of Tata Nano are expected to sustain the volumes going forward. However, given the poor showing of -0.7% YTD on the back of increasing competition and unfavorable economic scenario in the near to medium term, we expect the passenger vehicle segment volumes to experience muted growth of 2% CAGR to ~3,08,000 units by FY13.

Tata Motors to gain market share in the diesel vehicle segment

Given the negatives mentioned above, the PV segment YTD sales have remained flat. However, Tata Motors boasting of a predominantly diesel portfolio is well insulated from any slowdown and has infact improved market share in this segment to ~11.3%. Further, most of its new launches are positioned in the diesel segment viz Tata Nano Diesel, Tata Indicruz and Tata Safari Merlin which should further help consolidate market share. With Hyundai shelving its plans to set up a new diesel platform and Toyota having delayed its decision to launch an indigenous diesel car manufacturing facility limited competition is expected to work in TML’s favour.

PV market share PV Volumes and Growth

35.2%

21.6%

4.0%

1.6%9.5%

Maruti Hyundai Ford Honda Tata Motors

es

-20%

-10%

0%

10%

20%

30%

40%

100000

150000

200000

250000

300000

350000


PV Volumes % growth yoy (RHS)





Upcoming New Launches

TML’s Market Share in PV segment

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Ap

r-09

Ju

n-0

9

Au

g-0

9

Oct-

09

Dec-0

9

Feb

-10

Ap

r-10

Ju

n-1

0

Au

g-1

0

Oct-

10

Dec-1

0

Feb

-11

Ap

r-11

Ju

n-1

1

Au

g-1

1

Oct-

11

Market share-PV


Source: TML, Ventura Research Estimates

Company Segment Brand Launch date Petrol/Diesel Price Range

Maruti Compact Cervo Early 2012 Petrol 2.5-3 lacs

Maruti SUV Ertiga Early 2012 Both 7-8 lacs

Maruti Compact Palette Early 2012 Petrol 4-5 lacs

Maruti Compact MR Wagon Mid 2012 Petrol 4-5 lacs

Maruti Compact Swift Sport End 2012 Petrol -

Tata Compact Indica Vista Early 2012 Electric 5.75-6.25 lacs

Tata Compact Nano Early 2012 Diesel 2-3 lacs

Tata MUV Indicruz Late 2012 Both 9-10 lacs

Tata SUV Safari Merlin Early 2012 Diesel 8-12 lacs

Tata Executive Prima Mid 2012 Both 12-14 lacs

Hyundai Executive Avante Mid 2012 Both 11-12 lacs

Hyundai Sedan i30 Mid 2012 Both 9-10 lacs

Chevrolet Compact Spark Mid 2012 Petrol 2-3 lacs

Chevrolet Compact Spark Mid 2012 Electric 3-5 lacs

Fiat Compact Grande Punto Mid 2012 Both 6-7 lacs

Renault Compact Sandero End 2012 Both 5-7 lacs

Volkswagen Compact UP Mid 2012 Both 4.8-5.3 lacs



Debt not a matter of concern

While Tata Motors debt levels at `43973 crore (for FY12) seems high, however at the net debt level it stands at `22,910 crore or a net debt equity ratio of 0.8 which is expected to

reduce to 0.5% in FY13, providing us with significant comfort. Further only 70% of this debt i.e. ~`30,972 crore relates to the domestic and overseas automotive business, while

the rest of the debt is used to finance Tata Motors Finance Ltd.

Also short term / long term loan mix of the JLR business has significantly improved providing financial stability to the company.

In addition the consolidated business is expected to generate cash and cash equivalents of ~`21,000 crore and ~`24,400 crore in FY12 and FY13 respectively after taking all

capex expenditure into account.

Debt levels in FY11 (` in crore) Debt Mix-Automotive and Non Automotive

1589848%

818025%

871327%

TML JLR TMFL and Others

es

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

FY09 FY10 FY11 FY12 FY13

Rs i

n c

rore

Automotive Non Automotive

Automotive debt to come down



JLR’s improving debt profile

72%

28%

FY09

Long Term Debt Short Term Debt

es

62%

38%

FY11

Long Term Debt Short Term Debt





Subsidiaries on the growth track

Tata Daewoo Commercial Vehicles Ltd

Tata Daewoo Commercial Vehicles (TDCV) - the first overseas acquisition by Tata Motors in 2004 marking its step towards globalization. In 2010, TDCV’s JV with General Motors ran into rough weather and had to be called off. Its impact was felt in the sharp de-growth during that year. Subsequently, to get the Korean business back on track and to have better control on sales and distribution TDCV set up a wholly owned sales company- Tata Daewoo Commercial Vehicle Sales & Distribution Co. Subsequently, volumes have picked up and the company has regained market share. We expect TDCV to post 23% CAGR over FY12-13 to 13,280 units aided by the stabilization of its sales company. Consequently, we expect the revenues and earnings to grow by 24% and 11% CAGR to `4,476 and `90 crore respectively.

Tata Motors Finance Ltd

Established in 1957, Tata Motors Finance Ltd is engaged in financing of passenger cars & CV’s manufactured by Tata Motors Ltd. It currently enjoys a market share of around ~24%. Its book size was around `10,000 crore in FY11 and we expect it to grow to

~`18,000 crore by FY13 aided by growth in Tata Motors sales. Currently, it enjoys NIM’s

of ~8.6%, however, on account of higher interest rates, growing competition we forecast the NIM’s to be around 7.6% in FY13. We expect revenues and earnings to post a growth of 26% and 37% CAGR to `2,159 crore and `238 crore respectively by FY13.

TDCV Volumes TDCV-Revenue and PAT (` in crore)

0

500

1000

1500

2000

2500

3000

Tata Daewoo Volumes

Sales impacted due to the disturbance in JV with

GM

es

40

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80

90

100

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1000

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2000

2500

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3500

4000

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FY10 FY11 FY12E FY13E

Revenue PAT (RHS)





Tata Technologies Ltd

Tata Technologies Ltd (TTL) provides a range of services including Engineering and Design, Product Lifecycle Management, Enterprise Solutions, manufacturing and product development IT services to Tier 1 automotive and aerospace OEMs and their suppliers. The company has operations across North America, Europe, Middle East and Asia Pacific region. Since, ~60% of the revenues come from Europe and North America, it is extremely vulnerable to any sharp de-growth in these economies. Consequently, we expect revenues to grow at a CAGR of 8.5% and earnings to remain flat at `1,470 crore

and `133 crore repectively by FY13.

TTL - Revenue and PAT (` in crore)

0

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40

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140

160

180

200

0

200

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1,200

1,400

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Revenue PAT (RHS)


TMFL-Borrowings and Advances ROA, ROE and NIM’s

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

FY 09 FY 10 FY 11 FY 12E FY 13E

Rs in

cro

re

Borrowing Advancees

7.20

7.40

7.60

7.80

8.00

8.20

8.40

8.60

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

FY 10 FY 11 FY 12E FY 13E

(%)

ROA ROE NIM (RHS)

So Source: Tata Motors, Ventura Research Estimates




Key Concerns

Currency fluctuation Given the wide spread geographical reach in over 170 countries, more than 60% of total revenues are earmarked in foreign currencies which serve as a natural hedge against the forex loans taken by the company. Hence apart from translational gains / losses arising from reporting in constant currency we believe the company is adequately hedged on the forex loan portfolio. Source: Tata Motors, Ventura Research Estimates

Lower than expected volume growth in JLR

The global economic slowdown has significantly impacted the automotive markets worldwide, particularly in the US, Europe and UK, where JLR has a significant volume exposure. In case of any adverse event in the European region, the new market forays may not be sufficient to arrest the fall in global volumes.

Extreme volatility in raw material prices could hurt margins Rising raw material prices remains a key concern for the company. The volatility in the prices of steel, non ferrous and precious metals, rubber, and petroleum products and the other costs had adversely impacted the performance of TML in FY11. Profitability could be impacted to the extent the company cannot pass the increasing costs to the consumers.

TML-Foreign Currency earnings and debt (` In crore)

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FY09 FY10 FY11 FY12 FY13

Foreign Currency Sales Foreign Currency Debt (RHS)



Financial Performance

Tata Motors Ltd. (TML) reported a 27% yoy increase in revenues to `36,197.5 crore in Q2FY12 on the back of higher volumes, improved product mix and price hikes of ~1% taken in the quarter. Operating profits were higher by 12.4% yoy to `4,503.9 crore; however margins were down by 160 basis points yoy to 12.4% on account of higher raw material costs. Earnings witnessed a decline of 15.6% to `1,877.3 crore on the back of

forex losses on foreign currency borrowings of `439 crore as against a gain of `127

crore in Q2FY11. Net sales for FY11 stood at `1,23,133 crore higher by 33.1% aided by strong volume growth in the domestic business and robust volumes from JLR. Operating profits were higher by 136% to `16,514 crore and margins showed an improvement of 580 basis points to 13.4% on the back of higher volumes and improved realizations. Consequently, earning were more than double to `9,274 crore from `2,571 crore in FY10.

Quarterly Financial Performance

Particulars Q2FY12 Q2FY11 FY11 FY10

Net Sales 36197.5 28519.2 123133 92519.3

Growth % 26.9

33.1

Total Expenditure 31693.6 24517.6 106618 85508.4

EBDITA 4503.9 4001.6 16515 7010.9

EBDITA Margin % 12.4 14 13.4 7.6

Depreciation 1330.8 1094.9 4655.5 3887.1

EBIT (EX OI) 3173.1 2906.7 11859.5 3123.8

Other Income 345.5 210.4 732.4 3123.8

EBIT 3518.6 3117.1 12591.9 6247.6

Margin % 9.7 10.9 10.2 6.7

Interest 809.7 722.1 2385.3 2465.3

Exceptional items -439.0 127.6 231.0 -259.6

PBT 2269.9 2522.6 10437.6 3522.7

Margin % 6.3 8.8 8.5 3.8

Provision for Tax 363.3 313.1 1216.4 1005.8

PAT 1906.9 2209.6 9221.2 2516.9

Minority Interest & Ass -29.6 13.4 53 54

PAT (adj for MI) 1877.3 2223.0 9273.6 2571.1

PAT % 5.2 7.8 7.5 2.8

Source: TML, Ventura Research Estimates



Financial Outlook Aided by higher volumes in the domestic CV and JLR business we expect revenues to grow at a CAGR of 23.3% to `1,87,040.7 crore. Operating profits are expected to post a

CAGR of 14.2% to `21,517 crore in FY13, however, higher raw material costs and other expenses are expected to drag down the EBITDA margins to 11.6% from 13.5% in FY11. Consequently, we expect the PAT to grow at a CAGR of 11% to `11,413 crore as compared to `9,274 crore in FY11.

Valuation

We initiate coverage on Tata Motors as a BUY with a SOTP valuation based Price Objective of `262 representing an upside potential of 22.4% from the CMP of `214. We

have valued the JLR business on a P/E multiple of 7.5 in line with its global peers like BMW and Daimler. Although, they have higher number of platforms as compared to JLR their revenue and earnings growth are expected to be muted. We have valued the standalone business at a P/E multiple of 10.5 on account of its sustained leadership position in the CV segment and the gradual momentum in the Passenger vehicle segment. Further, we have assigned a 1.5 P/B multiple to TMFL (in line with peers) and other subsidiaries have been valued at 9x FY13 earnings to arrive at a target price of `262 per share. At a CMP of `214 the stock is trading at 6.3x and 5.9x its estimated

earnings for FY2012E & FY2013E representing a potential upside of 22.4% over a period of 12 months.

Revenue Growth PAT growth

0%

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SOTP Valuation Assumptions

Comparison of JLR with global peers

Comparison of TML with peers

Consolidated Data P/E EV/EBITDA Sales growth

Global Peers FY12E FY13E FY12E FY13E FY12E FY13E D/E

BMW 8.6 8.3 7.3 7.1 -1% 4% 2.4

Volkswagen 6.5 5.7 5.9 5.4 1% 5% 1.4

Daimler 8.2 7.1 8.3 7.4 -1% 7% 1.6

Ford Motor Company 7.8 6.4 8.9 8.1 2% 8% 15.8

Toyota Motor Corp 26.8 12.5 16.0 10.6 23% 9% 1.1

Tata Motors 6.3 5.9 4.5 4.2 24%* 24%* 1.9

*Jaguar Sales growth

Company FY 13 EPS Multiple Measure Value per share

Tata Motors Standalone 4.3 10.5 P/E 45.2

Jaguar Land Rover 26.7 7.5 P/E 200.3

Tata Motors Finance 7 (BV) 1.5 P/B 10.5

Tata Technologies 0.4 9 P/E 3.6

Tata Daewoo 0.3 9 P/E 2.7

Target Price 262.3

Source: Bloomberg, Ventura Research Estimates

Consolidated Data P/E EV/EBITDA Sales Growth


Tata Motors 6.3 5.9 4.5 4.2 24% 22% 1.9

Mahindra & Mahindra 14.6 12.5 10.3 8.8 32.6% 14.0% 0.9

Maruti Suzuki India Limited 16.2 12.5 9.1 6.9 -0.4% 19.4% 0.03

Ashok Leyland Ltd 11.3 9.3 6.9 6.1 15.2% 13.8% 0.6

Eicher Motors Ltd 12.1 10.6 5.1 4.2 18.8% 26.8% 0.1

Source: Bloomberg, Ventura Research Estimates



P/E

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Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12

CMP 6X 8X 10X 12X 14X


P/BV

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CMP 2X 3.35X 4.7X 6.05X 7.4X


EV/EBIDTA

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Consolidated Data


BMW 8.1 7.8 7.1 6.9 -1% 4% 2.4

Volkswagen 6.1 5.5 5.8 5.3 1% 5% 1.4

Daimler 7.6 6.5 7.6 6.8 -1% 7% 1.6

Ford Motor Company 7.6 6.2 8.8 8.0 2% 8% 15.8

Toyota Motor Corp 25.5 12.6 15.8 10.7 23% 9% 1.1

Tata Motors 5.2 4.9 3.9 3.6 24% 24% 1.5

P/E EV/EBITDA Sales growth



Financials and Projection

Y/E March, Fig in Rs. Cr FY 2010 FY 2011 FY 2012e FY 2013e Y/E March, Fig in Rs. Cr FY 2010 FY 2011 FY 2012e FY 2013e

Profit & Loss Statement Per Share Data (Rs)

Net Sales 92519.3 123133.3 152787.6 187040.7 EPS 8.1 29.2 34.2 36.0

% Chg. 33.1% 24.1% 22.4% Cash EPS 20.4 43.9 49.8 55.3

Total Expenditure 85508.4 106618.8 132900.4 165523.5 DPS 3.0 4.0 4.0 4.0

% Chg. 24.7% 24.7% 24.5% Book Value 25.9 60.4 90.0 121.4

EBDITA 7010.9 16514.5 19887.2 21517.2 Capital, Liquidity, Returns Ratio

EBDITA Margin % 7.6 13.4 13.0 11.5 Debt / Equity (x) 4.3 1.7 1.5 1.2

Other Income 3123.8 732.4 1135.7 1291.2 Current Ratio (x) 1.0 1.1 1.2 1.2

Exceptional Items -259.60 231.01 -495.0 0.0 ROE (%) 30.7 48.1 37.8 29.4

PBDIT 9875.1 17478.0 20527.9 22808.4 ROCE (%) 22.0 32.6 27.6 26.9

Depreciation 3887.1 4655.5 4945.6 6145.8 Dividend Yield (%) 1.4 1.9 1.9 1.9

Interest 2465.3 2385.3 3325.0 3704.0 Valuation Ratio (x)

PBT 3522.6 10437.2 12257.3 12958.6 P/E 26.4 7.3 6.3 5.9

Tax Provisions 1005.8 1216.4 1470.9 1619.8 P/BV 8.3 3.5 2.4 1.8

PAT 2516.9 9220.8 10786.4 11338.7 EV/Sales 1.0 0.7 0.6 0.5

Minority Interest & Others 54 53 60.8 74.5 EV/EBIDTA 12.8 5.4 4.5 4.2

Consolidated Net Profit 2571.1 9273.6 10847.2 11413.2 Efficiency Ratio (x)

PAT Margin (%) 2.7 7.5 7.1 6.1 Inventory (days) 44.9 41.9 42.0 42.0

Raw Materials / Sales (%) 67.0 64.6 65.7 66.5 Debtors (days) 28.6 20.5 20.0 20.0

Tax Rate (%) 29 12 12.0 12.5 Creditors (days) 135.4 110.7 110.0 110.0

Balance Sheet Cash Flow statement

Share Capital 570.6 637.7 637.7 637.7 Profit After Tax 2571.1 9273.6 10847.2 11413.2

Reserves & Surplus 7635.9 18533.8 27930.3 37892.8 Depreciation 3887.1 4655.5 4945.6 6145.8

Minority Interest & Others 213.5 246.6 292.2 348.0 Working Capital Changes 4626.0 -1431.8 929.5 1763.7

Total Loans 35299.5 32791.4 43973.3 44399.2 Others -3391.4 -504.6 45.6 55.9

Deferred Tax Liability 1153.6 1463.8 1463.8 1463.8 Operating Cash Flow 7692.8 11992.7 16767.9 19378.6

Total Liabilities 44873.1 53673.3 74297.2 84741.5 Capital Expenditure -5057.6 -7802.1 -16000.0 -15000.0

Goodwill 0.0 0.0 0.0 0.0 Change in Investment 655.4 -3138.1 -383.8 -24.0

Gross Block 67245.7 75047.7 91047.7 106047.7 Cash Flow from Investing -4402.28 -10940.1 -16383.8 -15024.0

Less: Acc. Depreciation 34232.4 39698.7 44644.3 50790.1 Proceeds from equity issue 1404.8 4703.2 0.0 0.0

Net Block 33013.3 35349.1 46403.5 55257.7 Inc/ Dec in Debt 325.7 -2508.1 11181.9 425.9

Capital Work in Progress 8915.9 11728.9 10500.0 10500.0 Dividend and DDT -344.9 -990.2 -1450.7 -1450.7

Investments 2219.1 2544.3 4157.0 4180.9 Cash Flow from Financing 1385.6 1204.9 9731.2 -1024.8

Net Current Assets 724.8 4051.1 13236.8 14802.9 Net Change in Cash 4676.2 2257.4 10115.3 3329.8

Misc Expenses 0.0 0.0 0.0 0.0 Opening Cash Balance 4121.3 8743.3 10947.9 21063.2

Total Assets 44873.1 53673.3 74297.2 84741.5 Closing Cash Balance 8797.5 11000.8 21063.2 24393.0

Ventura Securities Limited Corporate Office: C-112/116, Bldg No. 1, Kailash Industrial Complex, Park Site, Vikhroli (W), Mumbai – 400079 This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their articles. Neither Ventura Securities Limited nor any of the contributors accepts any liability arising out of the above information/articles. Reproduction in whole or in part without written permission is prohibited. This report is for private circulation.

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Initiating coverage tata motors ltd