Future of Tata Group Stocks – FY09

Tata Group is one of the oldest business house in India with varied interests from Engineering to IT to Chemicals to Hospitality. The group has been on continuous restructuring exiting legacy businesses and consolidating the few where it could be amongst the Top-3 or Top-5.

Here is an exclusive Study of Tata Group Stocks as reported by HDFCSEC.

Tata Motors:
Tata Motors is expected to report a CAGR of 14.4% in Net sales, on the back of volume CAGR of 12.1% for the period FY07-FY09E. It will report an adj. Net profit CAGR of 10.2% for FY07-FY09E. The standalone business at 13.0x FY09E EPS at Rs.738 and subsidiaries at Rs.182/share. Successful acquisitions of global brands Jaguar and Land Rover (JLR) will adversely impact the stock price and sentiment in the near term. HDFC maintains a BUY rating on the stock with a target price of Rs. 920 from a one-year perspective.

Tata Steel:
The company currently trades at a P/E of 7.4x its FY09E EPS of Rs 115 per share, which is at ~30% discount to its peers. Synergies from the Corus acquisition (~ $350-400 mn) will start reflecting from FY09E coupled with a reduction in concerns on financial leverage. BUY the stock with a price target of Rs. 1038 (an upside of 21.9%), at a target PE multiple of 9x FY09E EPS.

Tata Consultancy Services:
TCS is currently trading at a price-earnings multiple of 18.3x FY08E and 15.3x FY09E. More operating levers, tremendous client mining potential and superior skills in managing scalability and attrition, make us believe TCS may outperform Infosys in the near term. BUY the stock with a price objective of Rs.1170.

Tata Teleservices Mahrashtra:
The stock has seen significant appreciation and is currently trading at 16.7 times EV/EBIDTA on FY09E basis, at 22% and 62% premium to both RCOM and Bharti respectively. Thus, the stock is richly valued compared to its peers and also, the introduction of new players would lead to price wars, which can impact the expected turnaround in profitability in the near future. The stock is a Market performer with positive bias due to future potential catalysts like de-merger/ sale of tower business and allocation of GSM spectrum and with a price target of Rs 63.

Tata Chemicals Ltd:
TCL is on a strong footing across all its businesses over the next 2~3 years. We
expect TCL to benefit from firm prices and incremental volumes in soda ash and urea in FY09E. While, we are revising downwards our fully diluted FY08E EPS estimates by 22.9%. On FY09E valuation TCL trades at 10x PER, 0.34x PEG, 6.4x EV/Ebitda & 1.4x EV/Sales. BUY with a price objective of Rs 450.

Indian Hotels Company:
Domestically, though most players are building capacities, we do not envisage a supply glut until H2FY09. Thus ARRs would continue to be on an uphill during this period. Hoteliers increasing ARRs by 15% for the Oct’07-Mar’08 period is a case in point. Expect the profits for the IHC to grow by 28.4% in FY08E & 11.9% in FY09E, translating into an EPS of Rs 8 & Rs 9. We value IHC at Rs 180 (20x FY09E).

Tata Power Company:
In the wake of strong positive sentiment & hype for Reliance Power’s IPO, one
might see valuations for utilities’ stocks going upwards, leading to a significant re-rating of the entire sector. However, purely based on fundamental valuations, currently HDFCSEC maintains a negative bias for Tata Power, which is already trading at 4X its book value (FY09), which is at the higher end of the spectrum.

The management is targeting 15% topline CAGR and EBITDA margin expansion at 20% in the next five years through global voice and data capacity expansion, coupled with focus on high growth retail broadband. The challenging environment in its global business which forms (65% revenues FY07) would weigh on the overall performance of the company. Its fate will be decided by expected turnaround of acquisitions (TYCO & Teleglobe) by FY’09E. A negative bias on the stock is maintained.

Tata Tea:
TTL gained $523 mn from its 30% stake sale in Glaceau to Coca-Cola. TTL will use the sale proceeds to bring down the debt on the books of Tetley. According to Bloomberg consensus, the earnings growth is expected at 15.6% CAGR for the period FY07-FY09E. The stock is currently trading at 15.0x FY08E & 11.5x FY09E earnings, which seems fairly valued, given the modest earnings growth. Hence, one can Accumulate on Dips.

Titan Industries:
Only 5.4% of the Indian jewellery and watches market is organized and presents a huge opportunity to Titan. With a strong distribution network in this under-penetrated market and with its brand equity, Titan is poised to grow further. The company has an ROE of 42% due to optimum use of assets and better working capital management. The company is expected to have a strong earnings momentum of 33% CAGR (FY 07-09E) which is reflected in its rich valuation of 33.3x times FY 09E EPS.

Trent Ltd:
The company through its Westside and Landmark chain of stores, has carved a niche for itself in the booming retail industry. The company has registered consistent top line growth (55% CAGR FY 04-07) but with falling margins due to increasing raw material costs (72% CAGR FY 04-07) without a significant rise in the realizations per piece. Although the EPS is expected to grow at a CAGR of 20% (FY 07-09E) with a modest ROE of 9.5%, the stock is richly valued at 19.7x FY 09E EPS.

And the list goes on , but the above covered companies form the bulk of market-cap for Tata Group.