Tata Motors: Strong JLR outlook keeps domestic blues away

JLR's product pipeline and margin uptick will ensure good revenue and profit growth for the consolidated entity going ahead

Tata Motors has been on the uptrend over the last week at the bourses on expectations of  better volume performance as well product pipeline of its UK-based subsidiary Jaguar Land Rover or JLR. Upgrades by some brokerages in the recent past as well as strong volumes both in August as well as September (especially in the UK) helped the stock to touch its 52-week high on multiple occasions over the last month with analysts saying that stock has some more legs to run.

The upgrades have come on the back of two key parametres, margins and volumes. Margins for luxury car maker are likely to look up as new products aid favourably to product mix. "JLR's margins could expand by about 200bps over FY14/FY15 given the sucess of new Range Rover and RR Sport," say Jamshed Dadabhoy and Arvind Sharma of Citi Research.

Further shift in geographical mix toward China which accounted for 21 per cent of FY13 volumes (estimated to go up to 25 per cent in FY16) is also likely to be beneficial for margins if prices do not correct, they add. While China accounts for over a fifth of volumes, given higher average selling prices of the models sold there, revenue contribution is almost a third. Margins are expected to improve from 14.7 per cent in FY13 to about 16.6 per cent in FY15.

On the volumes front, led by jump in growth from China, the US and UK, most analysts have pegged a FY14 volume growth of 12-15 per cent over the FY13 number of 3.72 lakh. Analysts expect JLR to do better than its international peers and grow its volumes at 10-15 per cent over FY13-16 period. Its peers Audi, Daimler and BMW are expected to grow at half that number.

It is this higher volume growth estimates and margins as well as improved outlook in the US and China that has led analysts to give a higher valuation to JLR. Deutsche Bank analysts who have a target price of Rs 400 for the stock have increased the valuation of the company due to favourable macro environment in the US and China. The two markets account for 45 per cent of Tata Motors.

At the current price of Rs 350, the stock which has gone up nearly 17 per cent over the last month is trading at 7.6 times its FY15 estimates. Most analysts have target prices in the Rs 390-Rs 400 range over the next 12 months. While there is 14-15 per cent gains from the current levels, money managers advise that investors accumulate the stock for the longer term.

Says Manish Sonthalia, senior vice president and fund manager, Motilal Oswal AMC-PMS: "While near term gains are priced in the valuations, the triggers for the stock going ahead will come from JLR side (domestic business will take time to recover) both on the new product launches as well as higher monthly volumes. The second half of FY14 is expected to be strong and my estimates for FY14 JLR volumes is at 4.25 lakh."

Echoing this view, Mehraboon Jamshed Irani, Prinicipal and Head of Private Client Group, Nirmal Bang, who has a target price of Rs 500 over a 18-month period says that investors ought to take a longer term view. "Investors will get a good price appreciation on the stock over that period given that JLR is launching a slew of models in multiple new geographies (in addition to China, Russia) which will accelarate revenue growth. Given JLR accounts for almost all the profits, this is the best global play to own for Indian investors."

JLR:Outperforming peers

What will help JLR outperform its luxury car peers over the next couple of years, according to Nomura analysts Kapil Singh and Nishit Jalan are new launches, improved product mix, higher share of China and improved operating leverage.

Volumes in China are expected to go up on the back of increase in dealerships by two thirds to about 200 and sales of RR Sport. A slew of launches has meant that JLR's model launches according to Barclays Research is at the highest level in the last 20 years. Among the products lined up is a smaller version or baby Jaguar which will help JLR plug the gap in its product portfolio at the lower end of the luxury spectrum. The new launches not only help improve volumes but platform consolidation will help improve margins by increasing the number of models per platform from the current 1.3 to 2.5 by FY17 in line with other luxury car makers.     

Strong quarter

Domestic volumes for the company continues to disappoint with September numbers down 33.5 per cent year on year and 26 per cent year to date. While discounts and weak demand have been the key negatives in the commercial vehicle space, higher diesel prices and cut in discretionary spends have pegged back passenger vehicles space. The company at the consolidated level, however, is expected to be among few auto companies to be posting a strong growth in revenues (estimated to be up 26 per cent y-o-y) despite the poor domestic performance.

Revenue growth for JLR is expected on the back of a 29 per cent growth in volumes while margins are expected to move to higher trajectory both due to operating leverage as well better product mix. This should enable overall margins to move up 127 bps to 13.6 per cent. Consolidated net profit is expected to register a 37 per cent growth as compared to the year ago quarter.