Tata
Motors (TAMO) May Be Another Example Of Buying A Good Business Under Temporary
Distress (Mistry Saga, DeMo & BS-III); “TATA” Brand Is Coming Back
29/04/2017 (12:15)
Trading Idea: TAMO
LTP: 459
Buy on dips around: 450-435
TGT: 485-500 & 551 (1-3M)
TSL< 425 OR <415/405
Investment Idea:
Tata
Motors (NSE Symbol: TATAMOTORS; Sector: Automobiles; Industry:
PV/CV/LCV/MCV/HCV & Luxury Car Maker)
LTP:
459 (52W Range: 376-599; TTM EPS: 24.73; TTM PE: 18.39; Industry Average PE: 25
TTM BVPS: 237.83; TTM PB: 1.92)
Investment Strategy: Buy/accumulate
around 450-435
TGT1: 485-500 & 551 (1-6M)
TGT2: 590-625 & 700 (12-24M)
Technically,
TATAMOTORS (TAMO) has strong support of around 425-405 area, followed by
375 zone. The stock may be consolidating
after steep corrections of around 20% from the recent top of 551 after poor
Q3FY17 report card as a result of DeMo led temporary disruptions in the CV
market & tepid JLR performance and more recently for the adverse SC verdict
against BS-III compliance issues.
Despite
so much bad news, TAMO has not broken the 425 area even after recent market
correction to around 9075 zone in Nifty. Thus from time & price action, it
may be safely assumed that market has already discounted large part of the Q3
& subsequent BS-III pain.
The
scrip is gaining some strength and is basically waiting for some immediate
triggers like monthly sales figure of April’17, SC stance against the review
petition filed by the SIAM to reconsider some of its adverse judgment against
the automobile manufacturers like extension of 3 months to dispose of the old
BS-III CV (trucks, buses) etc to move accordingly.
Time & price action suggests that
TAMO has to sustain over 465-485 area for some short term rally towards 500-551
and further consecutive closing above 551, it may rally towards 610 & 700
area in the mid to long term.
On the flip side, sustaining below
425-415 area for any reasons, TAMO may further fall towards 405-375 zone in the
short term, where investors may further accumulate for better buying averages.
Financials & valuation metrics
for TAMO (Actual & projected as par previous trends & implied probability)
on consolidated basis:
|
ACTUAL
FY-16 EPS
|
32.7
|
|
ACTUAL
Q3FY17 EPS
|
0.36
|
|
ACTUAL
TTM Q3FY17 EPS
|
24.58
|
|
PROJECTED
Q4FY17 EPS
|
3.31
|
|
PROJCTED
FY-17 EPS
|
12.66
|
|
PROJECTED
Q1FY18 EPS
|
10.9
|
|
PROJECTED
TTM Q1FY18 EPS
|
16.99
|
|
PROJECTED
FY-18 EPS
|
25.48
|
|
PROJECTED
FY-19 EPS
|
36.19
|
|
TAMO
|
FY-16
|
FY-17E
|
FY-18E
|
FY-19E
|
|
EPS
|
32.7
|
12.66
|
25.48
|
36.29
|
|
BVPS
|
237.83
|
283
|
349
|
434
|
|
CEPS
|
82.56
|
74.22
|
84.16
|
95.64
|
|
Valuation
Metrics
|
FY-17E
|
FY-18E
|
FY-19E
|
|
MEDIAN
EPS
|
12.66
|
25.48
|
36.19
|
|
AVERAGE
PE
|
18
|
18
|
18
|
|
AVERAGE
VALUATION(EPS)
|
227.88
|
458.64
|
651.42
|
|
MEDIAN
BVPS
|
283.00
|
349.00
|
434
|
|
AVERAGE
PB
|
2.00
|
2.00
|
2.00
|
|
AVERAGE
VALUATION(BVPS)
|
566
|
698
|
868
|
|
MEDIAN
CEPS
|
74.22
|
84.16
|
95.64
|
|
AVERAGE
PCF
|
5
|
5
|
5
|
|
AVERAGE
VALUATION(CEPS)
|
371.1
|
420.8
|
478.2
|
|
MEDIAN
VALUATION
|
388.33
|
525.81
|
665.87
|
Table-1
|
Valuation
Metrics(TTM)
|
Q3FY17
|
|
ACTUAL
TTM EPS
|
24.58
|
|
AVERAGE
PE
|
18
|
|
AVERAGE
VALUATION(EPS)
|
442.44
|
|
ACTUAL
TTM CEPS
|
76.73
|
|
AVERAGE
PCF
|
5
|
|
AVERAGE
VALUATION(CEPS)
|
383.65
|
|
MEDIAN
VALAUTION
|
413.05
|
Financials
snapshots (Factsheet): Q3FY17 (QLY)-TAMO-Consolidated (in cr except EPS/per
share)
(For full report, please see the enclosed pdf attachment)
The
above factsheet shows that Q3FY17 result of TAMO is simply terrible and way
below previous market expectations and subsequently the stock also corrected a
lot, especially after DeMo & BS-III concerns, which affected CV sales quite
significantly on standalone basis.
In
Q3FY17, consolidated revenue for TAMO has dropped by 4.34% (YOY), but grown by
2.47% sequentially (QOQ); core revenue was almost flat; drop in other operating
income was more severe (-69.52% YOY; -11% QOQ).
Net
operating expenses (OPEX) was up by 1.02% (YOY) & 4.62% (QOQ), resulting in
sharp fall in EBITDA (-41.71% YOY; -17.85% QOQ).
Ultimately,
EPS was reported as 0.36 against estimate of 7.02 (YOY: 15.23; QOQ: 2.50); i.e.
down by around 96% & 85% (YOY & QOQ).
EBITDA
came as 5121.61 against estimate of 8290 (YOY: 8854.49; QOQ: 6282.57).
EBITDA
margin came as 7.64% against estimate of 12.3% (YOY: 12.54%; QOQ: 9.53%).
Average
EBITDA margin for last 5 QTRS is now stands around 11.07% & for last 5
years is at 13.72%. At this run rate, one can expect an average EBITDA margin
of around 12.40% in general; but TAMO has reported single digit EBITDA margin
for the last two quarters (7.65% & 9.53% in Q3 & Q2FY17). Combing all
these factors, one can expect an average EBITDA margin of around 9.50% for TAMO
in the base case scenario for the next few QTRS and if the company is able to
improve its operating efficiencies, the same may be further improved towards
the mean of 12.40% by FY-18. Average EBITDA margin for its main domestic
competitor, Maruti is now around 15%. Thus after considering all these factors,
projected FY-18 & FY-19 EBITDA margin may be fairly assumed at 10.95% &
12.40%.
PAT
margin at Q3FY17 came as -0.40% (PAT was negative at -268.36) against average
of 3.89% for the last few QTRS and 5.12% for the last 5 years. Thus, on an
average one can expect an average PAT margin of 3.5% & 5% in FY-18 &
FY-19 for TAMO against average of around 9.5% for its peer Maruti.
In
the same way, combining both short term (5-QTR) & long term (5-YLY), top
line (net revenue) may be expected to grow around 11.65% average CAGR over FY:
18-19. QLY implied trend is 1.12% per QTR (i.e. -4.48%) and YLY projected trend
is around 16.11%.
In
the above scenario of normal run rate, projected EBITDA, PAT & EPS and
subsequent valuation of TAMO may be:
|
TAMO
|
FY-17E
|
FY-18E
|
FY-19E
|
|
REVENUE
|
267263
|
298399
|
333163
|
|
EBITDA
|
25390
|
32675
|
41312
|
|
PAT
|
9354
|
12682
|
13363
|
|
SHARE
PF MI & ASSOCIATES(AVG)
|
1220
|
1220
|
1220
|
|
NET
P/L
|
10574
|
13902
|
14583
|
|
EQ
SHARE CAPITAL
|
685
|
705
|
731
|
|
EPS
|
30.87
|
39.44
|
39.90
|
|
AVERAGE
PE
|
18
|
18
|
18
|
|
MEDIAN
VALUATION
|
556
|
710
|
718
|
Table-2
Combining the above table-1 & 2,
final median/fair valuation of TAMO may be projected as:
For FY-17: 388-556 (Average: 472)
For FY-18: 526-710 (Average: 618)
For FY-19: 666-718 (Average: 692)
In
Q3FY17, earnings of TAMO were primarily affected by big loss in domestic business
and operational weakness in JLR.
TAMO-Standalone
PAT: -1046 (YOY: -137; QOQ: -631); estimate: -500
Domestic
business was impacted by de-growth in CV sales due to DeMo with MCV & HCV
sales fall by 9% (YOY), whereas LCV sales were almost flat. Overall, PV segment
grew by 25.4% (YOY) and within that, car segment growth was 31.1% led by new
launch of Tiago, which was the only positive sign, although helped by lower
base effect.
JLR-UK’s
PAT dropped by almost 62% (YOY) to GBP 167 mln due to lower EBITDA/Operating
margin despite revenue increased by 13.1% to GBP 6537 mln on retail volume
growth, which was up by 8.5% to 149288 units. The strong retail volumes were
due to higher volumes in China, USA & EU led by strong sales of Discovery
Sports, F-PACE and the new long wheel base (XFL) in China as par the company
management.
Obviously,
a weak GBP in Q3FY17 because of Brexit woes may have helped TAMO to clock
higher retail volumes as the same were relatively cheap in other cross
currencies (USD/EUR/CNY). But, at the same time, it may have affected the RM
(raw materials) costs of JLR-UK and thus EBITDA fell by 26.7% to GBP 611 mln
and margin was also affected by almost 5.10% to single digit at 9.3%; (EBITDA
estimate: GBP 865 mln with 13.4% margin). Also, Discovery was run out of stock,
which has caused the EBITDA margin by some extent (less favourable product
mix).
Thus,
cross currency headwinds, lower wholesale volumes, less favourable product mix,
higher discounts (especially in US; EBITDA impact: -0.5%) higher variable
marketing expenses & new model launch costs (EBITDA impact:-0.3%); biennial
pay negotiation settlement (EBITDA impact:-0.4%) may have impacted the
operational performance (EBITDA margin) of JLR in Q3FY17.
In
Q3FY17, overall volumes of Discovery, Range Rover & Range Rover Sports were
down by almost 64%, 23% & 13% (YOY) respectively. Huge fall of 64% in
Discovery volume has occurred because the model was run out of stock and being
a high/good margin product, it affected the overall EBITDA margin to a great
extent (around 2%). This may be the failure on the part of the JLR management
to correctly gauze the underlying demand for Discovery and adjust the
production mix accordingly. But, this may also be an exceptional one time
failure and going forward, the product mix can be easily adjusted as par market
demand & from the past experience.
Looking
ahead, JLR volume may be incrementally higher due to product launches in
wholesale segment for the Discovery and upcoming launches of several models,
such as mid-sized Range Rovers. The recent pick up in retail sales across USA,
China, EU (ex-UK) is also encouraging & sustainable on right product mix
& refreshment of existing models along with new launches.
Incidentally,
TAMO deals with almost five currencies (GBP/USD/EUR/CNY/INR) and reporting in
INR and thus the company need to manage its FX hedges more efficiently to avoid
FX & cross currency losses in the coming QTRS. Effective FX hedge rate may
come closer to spot rates much before the earlier anticipated two years because
of strength in GBP and an efficient management of FX hedges.
Due
to lower GDPUSD equation, TAMO has suffered a realized FX hedging loss of
around GBP 455 mln in Q3FY17 (QOQ: -274), since GBPUSD weakened by around 5% in
Q3. Incidentally, TAMO hedged 80-15% of its 1-5 year forward estimated revenue,
in anticipation of a higher GBPUSD, which has caused significant erosion of the
bottom line of the company. But the situation may also improve dramatically
from here on for favorable GBPUSD FX exchange rate as worst may be over for the
GBPUSD in the near term until actual Brexit negotiations (hard or soft).
In
Q4FY17, GBPUSD has gained by around 5% on an average after UK’s decision to
invoke the Article-50 & a fresh general election; i.e. hopes for a soft
Brexit against earlier perception of hard one. An expected huge win by UK PM in
the forthcoming election may be helpful for her to press for a soft Brexit with
EU authorities. Thus, an expected strong GBPUSD around 1.30 may also help
JLR-UK to improve its EBITDA margin in Q4FY17 and quarters ahead due to lower
RM costs & FX hedge loses/MTM.
In
Q3, management indicated that it may take 4-5 QTRS to reach 15% kind of EBITDA
margin trajectory and average discounts are likely to remain higher in FY-17 in
comparison to FY: 15-16. Also, JLR is quite confident about its volume
sustainability on the back of new launches/upgrades from CY-17 (new Discovery,
XF-China, mid size Range Rover & smaller crossover E-Pace). After capex,
JLR remains a positive FCF contributor in Q3FY17 by around GBP 54 mln. JLR is
expecting a good show in UK in Q4FY17 as traditionally, March is a strong month
for vehicle sale there, especially in the wholesale segment.
TAMO’s
China-JV (50%) is also expected to perform better in the coming days on the
back of ramp up in production and locally produced Jaguar to compete with
Chinese clones. In Q3FY17, China-JV has contributed PAT of GBP 35 mln (YOY: 22
mln; QOQ: 33 mln), a moderate growth of around 6% on QOQ basis, which may be
further improved, considering the China market potential.
For domestic operations,
TAMO has already intensified its effort to improve its profitability, volume
(PV) and to regain its market share in CV. The management has guided its
domestic capex at Rs.3500 cr till FY-19 for various product development
programs. Thus, most of the negative factors affecting the Q3FY17 performance
including Mistry saga, cross currency headwinds, DeMo blues, BS-III pain may be
transitory in nature and going forward one can expect stronger sales growth
& margin in FY-18 under the changed & rejuvenated management of
legendary N.Chandra; worst for TAMO may be already over or in the process to be
over and it may be another example of buying a good business model under
temporary distress with implacable management & backing of TATA groups/Sons.
The new TATA SONS Chairman, N.Chandra
has called for “Time to change” for TAMO from FY-18 by telling its
employees to change the game and bring back the past “TATA” glory, brand value
and incremental growth. Chandra has special focus on domestic operations, which
is suffering for the last few years for gaps in products and delayed launches
in the PV segment. TAMO-India lacked suitable products in high volume PV
segment such as compact SUV, premium hatch back and the MUV compared to its nearest
rival Maruti. There were inordinate delays in launching of several PV models
like Tiago, Nexon, a new Safari and a MUV in the past. The new management is
focusing on these issues and is trying to bring back the loss making domestic
business into a profitable venture.
Domestic business (CV) may be also
helped by pre-buying in FY-18 ahead of GST implementation,
BS-IV & scrapage policy and incremental demands from various state
transport corporations. Recently, TAMO has bagged a big order to supply 3192
Safari Strome to the Indian Army and the management expects more such order
from the Army, being a leading mobility solution provider to the Indian defence
sector. Ashok Leyland (ASL) is one of the closest rivals of TAMO in the defence
mobility sector, which is pegged to grow almost Rs.5000 cr in the next ten
years from the present size of around Rs.500 cr as Indian is one of the biggest
defence spenders in the globe now with a focus on “Make in India”. Thus even
with a 2-5% share, the potential opportunity may be big also for TAMO.
Recently, TAMO has also launched its
AMT range of buses at starting price tag of Rs.21 lakhs, which
may be ideal for heavy city traffic and less fuel consumption. The company is
also planning to launch an AMT version of its premium pick up van (Xenon) and
the management is quite confident for a 10-15% surge in volume for FY-18 led by
incremental sales of LCV, buses, PV/Tiago due to favourable GST rates (from 31%
to 28%) and urban & rural demand (7-CPC arrears, incremental auto loans,
good monsoons). TAMO has grown its CV volume by around 22% in FY-16, which is
almost double of the industry growth. For FY-18, auto industry body SIAM has
predicted an overall average 5% growth for the CV segment. Thus, TAMO management is very optimistic to grow more than the
system/industry growth in the coming days.
TAMO has already overtaken ASL, the
long time industry leader in Bus segment to become NO-1 in FY-17;
TAMO’s bus volume (MCV/HCV) grew by 22% to 18198 units (YOY: 14917); whereas
ASL’s bus sales declined by almost 10% to 17725 units (YOY: 19586). For FY-17,
total cumulative vehicle sales by TAMO grew over 6% to 542561 units (YOY:
511705). During FY-17, overall bus market (MCV & HCV) grew by 8% to 47262 units,
in which TAMO & ASL now has almost 40% & 36% share. The incremental
order for buses is being supported by various state transport corporations,
such as UP (1500 buses), Rajasthan & Haryana (870 buses each) and AP (630
buses).
Going
forward, Govt’s incremental thrust on state/public transports (buses) as a
development agenda under various schemes ahead of forthcoming state elections
may keep the demand of buses intact & growing. Regarding export of buses,
although TAMO management has taken a cautious stance citing reasons of external
factors, its export has improved decent by around 9.9% to 5650 units (YOY:
5142), whereas ASL’s volume declined significantly by around 20% to 4877 units
(YOY: 6135). Recently, TAMO has bagged an order to supply 500 buses to Ivory
Coast.
TAMO
is also planning for AMT versions of LCV & trucks apart from buses, which
may also generate good demand in the days ahead. The company is also in the
process to improvise its mini Pickup range (Ace) as par customer feedback,
which may also create good demand. The new prime truck (Yodha) is also expected
to be launched soon, which may also help to boost up the overall CV sales.
Market
is also concerned about impact of SC
verdict on the BS-III CV (trucks & buses) as despite fire sales with
heavy discounts (average 30%; in some cases almost 60%), TAMO-India may still
have around 20000 unsold BS-III CV units. There are mainly three options before
the truck makers to dispose of the BS-III CV: upgradation to BS-IV for resale,
export (which may take 6 months & may also block working capital) and
dismantling the BS-III CV for spare parts.
But as par TAMO, the unsold BS-III CV
inventories is now at around 15000 units valued around Rs.4000 cr, the company
does not apprehend any big loses as it’s planning to export the same shortly
(Bangladesh, Nepal, Sri-Lanka and some African nations). TAMO has already a
readymade market in the neighborhood export markets for around 40000 units/year
on a cumulative basis and thus it see no big issue to export these BS-III
(equivalent to EURO-III) CV(s); but one has to also watch any
regulatory/judicial impact on EURO-III vehicles in those countries as
environmental concern is also growing rapidly all over the world including
immediate neighbors of India.
TAMO
has also keeping some hopes for the review
petition filed by SIAM against the adverse SC ruling against BS-III
vehicles. SIAM has petitioned for another three months extension to dispose off
the old BS-II/III vehicles (CV). The company has also the option to convert BS-III
LCV/MCV to BS-IV for additional 5% costs, but such HCV conversion may not be
feasible at all, considering associated costs. Thus, TAMO has various options
to minimize its BS-III loses against an earlier calculation of 2.5-3.5% hit on
EBITDA margin for these BS-III issues, spread over FY: 18-19.
Soon
after SC verdict on the BS-III issue, TAMO has marginal fall in the wholesale
segment at 36000 units (YOY: 38000), while retail segment has grown
significantly at over 50000 units in March’17. It may be also noted that almost
all the companies has offered steep discount around 30% on an average against
normal 10% to dispose the old BS-III vehicles in the last few days of March’17
after the adverse SC verdict and thus bottom line may also be hit for the automobile
industries as a whole and TAMO may also be one of them.
As
par some estimates, around Rs.2500 cr or 2.5-3.5%% of EBITDA may be lost by the
automobile sector for additional discounts, incentives and other costs to
sell/dispose of the old BS-III vehicles. As par the TAMO management, the
company will take one off hit in the P/L (B/S) in Q4FY17 itself due to this
BS-III issues and may not allow it to mitigate in Q1FY18 onwards. Thus, market
will probably wait for the Q4FY17 result and management commentary/guidance for
TAMO and then depending upon that, the stock may take a definitive trajectory.
In March’17, TAMO-India has reported an
8% increase in total domestic sales to 57145 units (YOY:
53057); overall for FY-17, cumulative sales grew by around 6% to 542561 (YOY:
511705). Moreover, sales of PV grew by almost 84% to 15433 units in March’17 on
the back of favourable base effect, robust sales of-TTH- Tiago (hatchback),
Tigor (sedan) & Hexa (cross over) and the company is immense hopeful on
these new PV models. These new models are very aggressively priced in by TAMO
in comparison to its features available with other competitive brands and are
in high demand in the application based cab services as well (Uber/Ola). As par
the management, these models has set new benchmarks in their respective segment
signifying TAMO as one of the fastest growing manufacturers in India.
As
par some unconfirmed reports, in its recent annual dealer network meeting in
Beijing, TAMO-India has set a target to
sell 250000 PV in FY-18 on the strength/popularity of TTH and is expecting
to swing back the loss making domestic business into breakeven/profitability by
FY-19. TAMO-India sold 371350 PV in FY-13, may be on the back of Indica, Sumo,
Safari, which are very popular models at that time with less competition. Since
then the domestic PV sales has declined steadily as the company was not able to
launch any popular/relevant upgraded model until FY-16 to counter Maruti &
other brands.
In
FY-17, TAMO-India has sold 172504 PV units against FY-16 figure of 149420 (YOY:
+15%) as par SIAM data. Thus TAMO-India has lost almost 60% volumes between
FY-13 & 16 and from last FY-17, the PV sales graph is looking up on the
back of these new models (TTH); if the company is able to meet FY-18 target of
250000 PV units (+45% YOY), then it will be the highest ever sales in the last
four years.
The dealers of TAMO-India are quite
confident to achieve the big PV sales target for FY-18 on the
back of robust demand from the above mentioned new models (TTH). As par the
dealers, TAMO-India domestic PV sales were affected in the last few years
purely because of lack of good products. But the recent TTH launches have
changed that perception. The TAMO management has now a clear strategic plan
& details on product life cycle management and the dealers are also
confident that “TATA” brand is coming
back in the PV segment. TAMO management is focusing on two/three platforms
(hatchback, sedan, and cross over) for the PV segment against earlier/competitor’s
multiple / six platforms.
To
put it simple, till few years ago, no one might have thought to purchase an
Indica for his or her personal requirements as the model was basically marketed
as a “Taxi”. TAMO-India was also not able to bring any new product over the years
for the affordable PV segment in comparison to other manufacturers such as
Maruti, Hyundai etc. Now, with successful launches for these new models (TTH)
along with very aggressive pricing with lots of features, “TATA” brand is again
back for the PV segment. People are again showing interest for these brands
(customer & brand visibility).
TAMO-India
(standalone) is losing consistently for the last few years and thus expecting to be profitable by FY-19 on
the back of higher sales in CV and reduction of loses/break even in PV segment
supported by higher volumes (led by aggressive launches-TTH) and cost reduction
(OPEX) efforts. The company has also signed an agreement with Volkswagen-AG for
a manufacturing tie up to better utilize its full capacity in India.
TAMO’s CV volume
(MCV & HCV) is expected grow in Q4FY17 and subsequent quarters on the back
of pre-buying due to implementation of emission/BS-IV norms from April’17. For
FY-18, M&HCV segment may grow in double digit by more than 10% on overall
growth of India’s economic activity and incremental infra spend. Also, Govt may
announce some form of vehicle modernization programme on the back of growing
environmental concern (ban of vehicles above 10 years old with s scrapage
policy-Govt may offer discount for 50k maximum for old returned vehicles by way
of ED subsidy). Although such scrapage policy may also face some political
hurdles in different states, but if implemented, there may be significant
upside for volume of almost all the automobile companies including TAMO-India.
Also
TAMO-India is expected to launch two new
models per year in PV segment till CY-20 from 5-25 lakhs category and
overall, one can expect the standalone volume to grow by 15% in FY-18 with an
expected EBITDA margin of around 7.3%.
But there are some concerns
also for the domestic operations as these new models (TTH) are priced very
aggressively (lower) and as such, there may not be any material impact on the
overall EBITDA for the time being. Also, the turnaround for Truck business may take
more times as there is no real catalyst except BS-IV implementation in the near
term.
Due to improving domestic operations,
Fitch has also upgraded TAMO’s debt rating by one notch
recently from BB to BB+ with stable outlook. The rating agency (Fitch) upgraded
TAMO for sustained improvement in its domestic business over the past two
years, supported by growing CV volumes, successful new product launches in the
PV segment & renewed focus on the domestic capex via internal accruals and
JLR-UK’s strong credit profile. Incidentally, TAMO’s domestic operations &
BS size is quite small compared to JLR, which contributed around 85% of
EBITDA/PBT for the overall consolidated entity.
In
FY-17, CV volumes of TAMO-India grew by around 22% against industry average of
10%. Thus, the overall domestic operations may be quite robust on the back of
incremental CV & PV sales and the company is expected to clock growth more
than the system (industry average) in FY: 18-19. But, its EBITDA margin may be
under pressure around 3-4% due to intense competition in the PV segment and
rising RM & marketing costs. TAMO-India
is aiming for the 3rd position in terms of volume from the present 5th
position as of now; it was at the 3rd position till few years
ago (FY-13).
Fitch
feels that, demand for CV sales will improve in India by the next 1-2 years on
the back of improving economic activity. Thus, TAMO’s prospect should also
improve in this CV segment, especially MCV & HCV, in which it is
traditionally a strong player enjoying more than 50% of domestic market share.
On
JLR, Fitch noted that continuing good show is being supported by strong volume
growth of 17% (YOY) in the first nine months of FY-17, driven by strong
contributions from new launches. The new JLR model (Jaguar-XE & F-PACE)
will fill the vital gaps in JLR product portfolio and the strategy of premium
products may also result in higher EBITDA margin than its rating peers.
As
par Fitch, JLR is expected to grow its volume by 7-8% over FY: 17-20 with a
EBITDA margin stabilizing around 14% due to increasing economics of scale with
incremental volumes & production ramp up, focus on in house R&D and key
components procurement.
JLR has strong model/product cycle to
spur growth in the coming days and its modular strategy
(more models on the fewer platforms), ramp up of China JV and new production
facility (Slovakia) may also help it to prune costs for a better EBITDA margin.
Thus,
in brief key tailwinds & headwinds of TAMO may be summarized as:
Key Tailwinds:
1. Traction
in JLR business on the back of right product mixing and new launches with
refreshment of existing models.
2. Strategic
focus to revive the overall business by expansion of top line (volume &
revenue), agile cost/OPEX management, structural improvement, customer
centricity (expansion of dealer network), filling product gaps by regularly
launching new & refreshed models
with lean & accountable organizational structure (lower costs & good corporate
governance).
3. Domestic
CV business may achieve 60% market share against present 52-55% BY FY-19
supported by new product launches.
4. Domestic
business traction in PV segment led by new models such as Tiago, Tigor, Hexa
& Nexon (compact SUV), which is seeing good demand & higher waiting
period.
5. Huge
scope for improving domestic PV business on the back of robust growth led by
retails & app based cab business (Uber/Ola). In Metro cities, due to
increasing congestions and parking problem, lots of people are using Uber/Ola
for more convenience despite having own a car.
6. Infra
development & thrust for road development (expressway) may also pave the
way for more domestic demand for automobiles (PV & CV-LCV/MCV/HCV in trucks
& buses).
7. GST,
if implemented in its right form may also help the domestic logistic business
as interstate CV movements will be at ease, which in turn may also translate
into higher CV demands.
8. Incremental
demand from Indian defence sector for its mobility solution.
9. Increasing
demands from overseas countries for buses & trucks having EURO-V system.
10. Aggressive (lower) pricing for Tiago, Tigor,
Hexa is causing both customer & brand visibility at Tata dealer’s outlets
again after a long time. TAMO-standalone being a very small part (15%) of
overall TAMO-Consolidated (JLR), there is immense opportunity for the domestic
business to grow in comparison with nearest domestic rival (Maruti) and improve
its fragile operational & balance sheet metrics.
Key risks: Headwinds
1. Adverse
FX & commodity (RM) volatility.
2. Sluggishness
in global economy (reflation), specially in US & China.
3. China
jitters due to credit bubbles & PBOC tightening.
4. Any
hard Brexit for UK & associated uncertainties.
5. Auto
loan bubble in US.
6. Higher
marketing expenses & incentives for various models of JLR in H1FY18.
7. Model
recycling & replacement costs for JLR in H1FY18.
8. Any
adverse effect of border tax by Trump, if implemented in reality.
9. Weakness
in other overseas markets such as Russia, Middle East & Brazil for JLR.
10. Any probability of muted domestic growth for
M&HCV segment due to spillover effect of DeMo & GST disruptions (confusion
regarding exact cut off day for input tax credit may force both dealers &
manufacturers to minimize the inventory & production, which may be a common
system issues for all goods sector including automobiles & TAMO).
11. High
domestic net debt/EQ ratio of around 0.93-1.00, although consolidated D/E ratio
is reasonable with strong credit profile
of JLR; net debt increased to Rs.200 bln in Q3FY17 from 180 bln in Q2FY17.
12. Despite
implementation of BS-IV norms, H1FY18 may be muted for M&HCV as March sales
were more than normal because of excessive discount (pre-buying ahead of
implementation of BS-IV norms).
13. Strong USDINR may also affect RM costs
adversely, although chances of a weak INR may be remote at this point of time
on the back of stable & improving macro outlook & political stability
of India.
14. Generalized market risk as Nifty is trading
near life time high with stretched valuation at around TTM PE of 23.79; any
steep correction below 9000 level because of any global jitters as well as
unforeseen domestic concern, may also result in some correction for TAMO scrip
also, albeit lower because it has already corrected to a good proportion.
15. Although, hope for a favourable review
petition by SC is very slim, an official rejection may also cause some short
term volatility for the scrip.
16. Any poor monthly sales figure for April’17
& below expected Q4FY17 report card/guidance to be released on 30/05/2017
may also cause short term volatility for the scrip
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