Tata Motors: Equity dilution to have marginal impact on earnings

Inexpensive valuations, possible revival in domestic market, debt restructuring likely drivers for stock

Tata Motors has been in the news for several reasons. The market has taken the news on it its debt-restructuring plan and granularity of Jaguar Land Rover sales data for February in its stride, though earnings have been cut marginally for FY16 and FY17.

On Wednesday, the board cleared a rights issue of Rs 7,500 crore and buyback of non-convertible debentures, which the Street believes will impact the firm positively. Even though equity dilution will impact the company's earnings, the funds will help retire debt and fund capital expenditure.

The debt-reduction plan through equity dilution has been received well by the market even though it would dilute earnings per share (EPS) by four per cent. The firm eyes Rs 7,500 crore from the rights issue, which will result in an equity dilution of 5.1 per cent. This is marginally higher than what analysts expected but Morningstar says it’s not significant enough to cause any change in the fair value estimate of Rs 700 a share.

  The Street remains optimistic. First, valuations are quite attractive as the stock is trading at a price/earnings multiple of eight times its FY16 earnings and 6.8 times the FY17 earnings. Secondly, some analysts believe Jaguar Land Rover (JLR)'s volume growth will normalise from the June quarter. The company reported a 1.2 per cent decline in JLR's wholesale volume (38,541 units) for February. Analysts believe it is due to shift in production of some lines to China. While some of it is to do with capacity constraints, a 20 per cent decline in China has increased the risk to volumes in FY16. Financial year-to-date, Land Rover's volumes have grown by 10.5 per cent, while that of Jaguar's declined by 4.2 per cent, taking the overall volume growth down to eight per cent.

Motilal Oswal Securities says JLR’s volumes have been hit due to transitory events such as capacity expansion at Solihull and China Chery joint venture plant, which resulted in gradual transition of manufacturing of select products from the UK to China. The brokerage has cut earnings estimates for FY15, FY16 and FY17 by 14 per cent, 8.5 per cent and six per cent, respectively.

What gives comfort is the recovery in commercial vehicle volumes in India since August. Tata Motors is also planning to launch sports utility vehicles in India later this year. Religare Institutional Equities is building in a 17 per cent compounded annual growth rate in Tata Motors’ commercial vehicles volumes over FY15-FY17, and net profit of 31 per cent.