While Tata Motors registered a 50 per cent year-on-year rise in consolidated sales in May to 80,000 units (on a low base), the road ahead might not be as smooth, especially for its subsidiary Jaguar Land Rover (JLR). While sales at its UK-based unit, which accounts for over half the consolidated sales, surged 72 per cent year-on-year, it could run into rough weather given the debt crisis and the possibility of Europe heading into a recession. Europe accounts for half of JLR's global sales.
JLR worries
Though JLR had an excellent 2009-10 with sales rising 17 per cent to about 208,000 and the first two months of the current year seeing a 66 per cent jump, overall car sales in the euro zone seem to be declining. Sales in Europe, according to European industry body ACEA, are down for two months in a row — 9.3 per cent in May and 7.4 per cent in April, compared to the year-ago figures, due to withdrawal of scrappage schemes and the worsening economic environment. Analysts say this will hit JLR as consumers cut discretionary spends, which will hit luxury car makers first.
Product launches have been the company's mainstay and Tata Motors will be pinning its hopes on the new Jaguar XJ model to improve volumes this year. While its other big markets, North America and China, could see an improvement, this might not be enough to overcome the dip in sales that is expected in Europe.
| LOCAL BOOST, JLR WORRIES | ||
| In Rs crore | FY11E | % chg |
| Sales | 99,895 | 8.70 |
| Ebitda | 10,892 | 36.00 |
| Net profit | 3,529 | 33.80 |
| P/E (x) | 13.60 |
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| E: Estimates; Consolidated financials Source: Edelweiss Sec | ||
The strong domestic demand environment, however, could keep volumes high.
Domestic story still strong
Though the second half of the financial year is traditionally the stronger period, accounting for 60 per cent of commercial vehicle (CV) sales, pre-buying due to extension of new emission norms could lead to a jump in sales.
The company recorded a robust 60 per cent year-on-year growth (five per cent sequentially) in CV sales in May. While it has been gaining market share across all segments, it could face stiff competition in the light CV (LCV) space, with competition launching a slew of products over the last one year.
| SUM OF THE PARTS VALUATION | |
| Tata Motors standalone | 412.00 |
| Subsidiaries* | 100.00 |
| Jaguar Land Rover | 185.00 |
| Total (Rs per share) | 697.00 |
| *annualised; E:Estimates | |
Unlike medium and heavy CVs, where it has pricing power and has raised rates by up to 9 per cent, it has not been able to effect major price increases in the LCV segment. In the passenger vehicles segment, declining sequential sales could change with Nano available on demand following start of commercial production at its plant in Sanand, Gujarat.
Investment rationale
Overall, expect the company to post 15 per cent growth in volumes, driven by its CV portfolio (45 per cent of standalone revenues) and Nano. However, the deteriorating environment in Europe could play spoilsport for the group’s growth in 2010-11.
While the business performance is a mixed story, there are certain positives on the financial front. The company has been able to cut its debt by about Rs 7,000 crore to Rs 23,000 crore with debt to equity ratio coming down by half to 2.5 times. This has been achieved through FCCB conversion, GDR issue, rights issue and divestment, the last being its stake sale in Telecon to partner Hitachi for Rs 1,160 crore.
| FLYING HIGH ON LOW BASE, RECOVERY | ||
| In units | May CY10 | % chg |
| CVs | 36,689 | 45.00 |
| M&HCVs | 14922 | 57.50 |
| LCV | 19943 | 32.90 |
| Others | 1,824 |
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Source: Edelweiss Sec
The company plans to bring down its debt to 1:1 in two years. At Rs 802, the stock is quoting at 13 times its 2010-11 earnings and could be considered on dips.
