On the fast track, but...

Tata Motors has been an outperformer, but the market is watching how it tackles margin pressure and slowing domestic sales.

The Tata Motors stock jumped 9 per cent after it reported robust November sales numbers for its subsidiary Jaguar Land Rover (JLR), which has been a major outperformer in 2010. Against the Sensex’s 15 per cent returns, Tata Motors has delivered over 70 per cent gains. However, given the concerns regarding sagging Nano sales and margin pressures in the standalone business, this outperformance looks difficult to sustain in the near future.

While a majority of analysts have a buy rating on the stock, their sum-of-the-parts based target prices range from Rs 1,395 to Rs 1,514. Experts suggest most of the positives are already factored in the current price of Rs 1,349 and the upside from these levels is limited (3-12 per cent based on the target price). They instead suggest investors look at DVR (differential voting rights) shares of the company, which despite jumping 6 per cent over the last 10 days, are trading at a 38 per cent discount to the ordinary shares. Analysts expect this discount to narrow and DVR shares to deliver 17 per cent returns in a year’s time.
 

ROBUST SALES, MARGIN WOES
In Rs crore	FY10	FY11E	FY12E
Net sales	92,519	115,508	132,369
% chg y-o-y	30.40	24.80	14.60
Ebitda	8,614	15,555	16,990
% chg y-o-y	292.00	80.60	9.20
Adjusted PAT	892	7,690	8,491
% chg y-o-y	LTP

762.10 10.40 P/E (x)95.5011.8010.70 E: Analysts estimates; LTP: Loss to profit,         Source: Company, Fortune Research

JLR gains
The outperformance seen in Tata Motors’ counter so far has been due to the turnaround in JLR’s performance, robust commercial vehicle sales and debt reduction.

JLR sales, which have grown at a robust pace through the year, grew 22 per cent year-on-year in November. The sales volume, which was higher on a sequential basis, was driven by a revival in the UK market as well as a strong showing in the US. Given that the second half is a better period than the first because of seasonal factors, it is expected to sustain a year-on-year volume growth of 21 per cent for 2010-11, analysts believe.

Sales volume in the company’s domestic commercial vehicle (CV) business, too, was robust in the first half. While the October and November sales were somewhat subdued (on a sequential basis), they were in line with expectations, coming after the change in emission norms in September. On the contrary, the demand for Light CVs remains strong and despite heightened competition, the company has been able to register good growth. While the prospects for the overall CV business look healthy, Nomura has reduced its 2010-11 estimated growth to 25 per cent from 30 per cent to factor in lost volumes due to production constraints.

The area of concern has been the passenger vehicle business, where recent sales for the company are not too encouraging. The company has been losing market share due to severe competitive pressures, production constraints and a lack of new products, barring Manza and Aria. Even without the Nano, which faces production and inventory issues, its 2010-11 year-to-date (till October) passenger car year-on-year volume growth was 22 per cent versus the industry’s 31 per cent, noted Nomura analysts.

While the Indica is likely to face competitive pressures, the company believes the steps taken to improve Nano volumes (open sales across the country by March 2011 from 12 states currently, improvement in the availability of finance and enhanced after-sales service options) should bear fruit over the coming quarters.

Improving margins, but...
Over the last five quarters, higher Ebitda margins at JLR have buoyed the consolidated margins of Tata Motors. The product and market mix, lower incentives, rising sales and favourable currency movement have helped in improving realisations. Analysts believe though the company faces higher raw material costs and adverse currency movement, its cost-cutting measures and operating leverage brought on by good demand should allow it to maintain margins in the 15 per cent range.

The problem area has been the standalone business where margins are falling on the back of rising raw material costs. Given the cost escalation in steel and rubber, which the company has not been able to pass on fully, Nomura analysts have revised their 2010-11 estimated margins for the standalone business by 50 basis points to 10.1 per cent. The company, however, says it plans to maintain margins across the group, through a mix of cost control activities and judicious price hikes.

The December quarter numbers will perhaps given an indication of how things are going to shape up on this front. Among other monitorables will be the results of the company’s initiatives to revive sales of its prestigious project, Nano.