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Tata Motors – Strong on Volumes + Improving CV

October 29, 2009

Tata Motors reported PAT of Rs7.3 bn versus our estimate of Rs5.1 bn, with the upside largely driven by a higher profit on sale of investments. At an operating level, results were in line with expectations with EBITDA of Rs10.5 bn compared to our expectation of Rs10.4 bn. Higher than expected realizations resulted in revenues of Rs79.8 bn beating our Rs78.2 bn estimate. 2QFY10 EBITDA margin at 13.2% grew 520 bps yoy largely on account of price increases, higher volumes (+12.3% yoy) and lower raw material costs led by a yoy decline in commodity prices. Adjusted PAT (excluding gains from investment income) of Rs3.7 bn marginally ahead of our expectation of Rs3.6 bn.

The LCV portfolio, comprising the Ace and its variants, is now one of its most profitable product ranges. Recovery in M&H CV volume in 2H and more bus sales could boost profit, in our view. Analysts Raise FY10E CV growth for (1) trucks at 15% from 5%, (2) light vehicles at 30% from 8%.

EPS Estimates and Target:
HDFC Sec expects Tata Motors to report an STANDALONE EPS of Rs 32 and Rs 43.2 for Fy10 and FY11 respectively. SOTP Valuation is at Rs 732 [648 + 84 of subsidy company]

BOFA-Merrill expects it to report EPS of Rs 45.65 for FY11 with a Target Price of Rs700 based on FY11E, being the sum-of-theparts of: (1) standalone business valued at 8.5x EV/EBITDA, equivalent to 5% premium to mid-cycle valuations, on better scale and likely market share gains (2) JLR at 0.35x EV/Sales.

Kotak is bearish on Taat Motors as poor cash generation in both domestic and JLR businesses reinforces our SELL rating and a Target Price of Rs 465.

Nomura is concerned about JLR’s free cash flow generating ability and is neutral on the STOCK with a Target price of Rs 420.

Anand Rathi is positive on the stock with a target price to Rs672 with sum-of-parts based on 16x standalone core EPS of Rs29.5 (Rs472), the value of subsidiaries of Rs82, the value of the Tata Sons stake at Rs44, and the value of JLR at Rs74.

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