Tata Motors: Buy

Investors with a long-term perspective can buy the Tata Motors stock. At the current market price of Rs 801 it trades at a PE of about 5.5 times its trailing twelve month consolidated earnings. Improved cost structure, product and market mix at JLR (Jaguar Land Rover), a low debt-to-equity ratio and focus on the less cyclical domestic LCV ( light commercial vehicle) market strengthen the case for investment. Unease about moderation in the domestic auto industry and a slowdown in JLR’s key markets of US and Europe coupled with broader market volatility has seen the stock hit its 52-week low of Rs 785 earlier this month. The first quarter results too have been sedate , with the consolidated year on year net profit growth at less than one percent.

With the steep correction in the stock price, the apprehensions seem to have been factored in. Moreover, JLR has continued to do well operationally with a top line growth of 20 per cent year on year and EBITDA margins, at around the same 15 per cent recorded in the June 2010 quarter. Retail sales grew by 7 per cent, in volume terms during this period. JLR’s 3 per cent year on year drop in profits has been due to an unfavorable revaluation of foreign currency denominated assets and liabilities and higher taxes. One-time costs such as expenses incurred on the issue of bonds and pre-payment charges on high-cost debt repaid have also capped profit growth.

Better product, market mix

Going forward, questions on the financial stability of some countries in Europe and concerns on the raising of the debt ceiling in the US might slowdown the volume growth for JLR in these regions. Both UK and Europe has seen demand soften in the first quarter While the first quarter volumes have been partly affected by the impending launch of the MY12 (model year 12) products and engine constraints for Jaguar, the company hopes to mitigate the risk of a slowdown by rebalancing its product and market mix. September 2011 would see the launch of the Range Rover Evoque, a compact SUV, and an entirely new segment for JLR. The Evoque already has about 18000 booking worldwide. The 2012 Jaguar XF will also be launched shortly along with other refreshed JLR products. In terms of markets, the company is focusing on emerging markets like Russia and China. Having grown at 55 per cent and 48 per cent respectively in the first quarter, these emerging markets currently bring in about 22 per cent of the total volumes. On the operating front too, the company is better equipped to handle a slowdown than last time having brought about variety reduction in materials, standardisation of parts across models and platforms, improved sourcing from low cost destinations (at over 20 per cent currently) and setting up assembly plants in countries like India . The consolidated net debt to equity in the core automotive business (excluding the finance arm) has also been brought down to 0.69 as on June 30.

Domestic initiatives

Back home, the company has grown better than the industry in both the Medium Heavy Commercial Vehicles (MHCVs) and the S&LCV ( Small and Light Commercial Vehicles) segments in the first quarter, growing by 5.5 per cent and 19 per cent. Considering the high interest rates, slow industrial output and the flat freight rates, a further moderation in the CV industry is on the cards. But infrastructure spending and the catching on of the hub and spoke model may keep demand for tippers and trailers going. It is also banking on the strong demand for the less cyclical SCVs to bring in volumes. Capacity expansions for Ace/Magic, and the ramp up of Ace Zip and Magic IRIS is expected to provide further impetus to growth. Competitive pressures on the passenger car segment, however, remain. The company hopes regain lost market share by expanding dealer networks to semi-urban/rural areas, by more focused promotion efforts and through launches such as the Aria two-wheel drive, Vista refresh, new Safari and Manza limited edition. The softening of commodity prices also indicates that margins pressures for the standalone entity may ease up from hereon.

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