Tata Motors - Motilal Oswal Group...Mar 02, 2017 · Source: Company, MOSL . Land Rover’s...

Restoring missing parts

Tata Motors

Update | 2 March 2017Sector: Automobile

Investors are advised to refer through important disclosures made at the last page of the Research Report.Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Jinesh Gandhi ([email protected]); +91 22 6129 1524

Aditya Vora ([email protected]); +91 22 3078 4701

Strongpipeline

BetterFx hedge

Peakingcapex

Operatingleverage

Tata Motors

2 March 2017 2

Contents | Tata Motors: Restoring missing parts

Summary ............................................................................................................. 3

JLR volumes to grow at 19% CAGR over FY17-19 .................................................... 5

JLR margins: worst of mix & -ve op. leverage behind us… .................................... 14

India business: Several levers for recovery .......................................................... 22

Restoring missing parts ....................................................................................... 29

Bull and bear cases ............................................................................................. 32

SWOT analysis .................................................................................................... 33

Tata Motors

2 March 2017 3

Restoring missing parts Strong pipeline, Improving hedge rate and op. leverage at play After 2 years of turbulence for TTMT, we believe worst is behind and things are

Restoring missing parts for both JLR (favorable product pipeline, favorable Fx movement and peaking capex) and India business (several levers for CV recovery and strong pipeline for PVs).

We expect JLR’s volumes (including JV) to grow at a CAGR of 19% over FY17-19, driven by 14% CAGR for Land Rover and 31% CAGR for Jaguar on the back of launch of two new models along with six major refreshes.

We conservatively estimate ~550bp expansion in EBITDA margin over FY17-19 (to ~16.1%), driven by favorable forex and operating leverage.

Despite peak capex, we expect JLR’s FCF to improve considerably, with FCF conversion of ~85% of PAT by FY19 (v/s average of 30% in last 3 years).

India PV business can potentially break even, driven by favorable product pipeline, implying 6-7% accretion to our FY19E SOTP.

We estimate 134% consolidated EPS CAGR over FY17-19 (albeit on a low base, after declining ~46% CAGR over FY15-17). Maintain Buy with a TP of INR653 (FY19E SOTP-based). TTMT is one of our top picks in Autos.

JLR volumes to grow at 19% CAGR over FY17-19, driven by exciting product pipeline: We expect JLR’s volumes (including JV) to grow at a CAGR of 19% over FY17-19, driven by 14% CAGR for Land Rover and 31% CAGR for Jaguar. With the launch of two new models along with six major refreshes, JLR would have a younger portfolio – average age to be 3.1 years by FY19 versus 3.8 years currently. Continued recovery in China, coupled with launch of Ingenium gasoline engine in gasoline-dominated markets like China and USA would also support volumes. With EVs estimated to have 75-100% of incremental market share by 2025, its early mover advantage in EVs augurs well for JLR. Its’ I-Pace is scheduled for launch by September 2018, ahead of its German peers. JLR EBITDA margin to recover 550bp over FY17-19, driven by favorable Fx and operating leverage: JLR’s EBITDA margin recovery would be driven by (a) gradual improvement in hedge rates from 2QFY18 onwards, (b) shift from outsourced engines to captive Ingenium engines (~15% of volumes in FY16 to ~53% by FY19), and (c) operating leverage benefits, as fixed costs are over 20% of sales. We conservatively estimate ~550bp expansion in EBITDA margin over FY17-19, driven by favorable Fx and operating leverage, but we are yet to factor in for a) recovery in high margin products (RR+ RR Sport+ Discovery) led by major refreshes and b) benefit of modular platform strategy.

Update | Sector: Automobiles

Tata Motors

CMP: INR449 TP: INR654(+46%) Buy

BSE Sensex S&P CNX 28,984 8,946

Stock Info Bloomberg TTMT IN Equity Shares (m) 2,887 52-Week Range (INR) 599/300 1, 6, 12 Rel. Per (%) -14/17/36 M.Cap. (INR b) 1,436.3 M.Cap. (USD b) 21.5 Avg Val, INRm 4202 Free float (%) 65.3

Financial Snapshot (INR b) Y/E Mar 2017E 2019E 2019E Net Sales 2,803 3,212 3,993 EBITDA 301.6 425.1 610.9 PAT 43.3 120.5 238.1 EPS (INR) 12.8 35.5 70.1 Gr. (%) -65.4 178.3 97.5 BV/Sh (INR) 250.0 282.3 349.1 RoE (%) 5.2 13.3 22.2 RoCE (%) 4.8 10.7 17.0 P/E (x) 35.2 12.7 6.4 P/BV (x) 1.8 1.6 1.3

Price as on 1st March 2017

Shareholding pattern (%) As On Dec-16 Sep-16 Dec-15 Promoter 34.7 33.0 33.0 DII 14.8 14.5 17.4 FII 24.2 26.1 23.6 Others 26.2 26.4 26.0 FII Includes depository receipts

Tata Motors Restoring missing parts

Jinesh Gandhi +91 22 3982 5416

[email protected] Please click here for Video Link

Tata Motors

2 March 2017 4

India business – several levers for recovery: While domestic CV volumes are ~10% off from the peak of FY12, confluence of several factors creates uncertainty for FY18. We believe building blocks are Restoring missing parts for the PV business turnaround through (a) exciting product pipeline, (b) new business strategy based on reducing complexities and capex intensity of the business, and (c) improving organizational structure for greater agility and responsiveness. PV business EBITDA breakeven could add 6-7% to our SOTP value.

Valuation and view – Restoring missing parts: JLR is poised for sharp recovery, driven by (a) strong product pipeline, (b) beneficial Fx movement, (c) favorable operating leverage, and (d) improved FCF conversion. The India business is interestingly positioned with several levers to drive turnaround for both PVs and CVs. We estimate 134% consolidated EPS CAGR over FY17-19 (albeit on a low base, after 46% CAGR decline over FY15-17E). The stock trades at 12.7x/6.5x FY18E/FY19E consolidated EPS. We maintain Buy with a target price of INR653 (FY19E SOTP-based). We value JLR at 3.5x EV/EBITDA and the Indian business at 8x EV/EBITDA. TTMT is one of our top picks in Autos.

Exhibit 1: Tata Motors - Things restoring missing parts JLR FY14-16 FY17-19E # New launches 5 8 # SUV launches 3 6 GBP/USD (Avg hedge rate) * 1.55 1.42 Capex + R&D as % of sales 14.2 13.3 Model to platform ratio 1.4 2.8 FCF conversion (% PAT) 41 73 Standalone Change in CV market share -10 Change in PV market share -0.1 * for FY16-17E and FY18-19E

Source: MOSL

Exhibit 2: Tata Motors - SOTP based fair value

INR B Valuation Parameter Multiple (x) FY18E FY19E Tata Motors - Standalone EV/EBITDA 8.0 199 261 JLR (Adj for R&D capitalization) EV/EBITDA 3.5 948 1,509 JLR - Chery JV EBITDA Share EV/EBITDA 3.5 105 118 HV Axles EV/EBITDA 8.0 8 8 HV Transmission EV/EBITDA 8.0 6 6 Tata Technologies EV/EBITDA 8.0 48 54 Tata Daewoo EV/EBITDA 5.0 20 23 Total EV 1,334 1,978 Less: Net Debt (Ex FCCB & TMFL) 258 -35 Add: Other Investments Tata Motors Finance P/BV 1 37 39 Other Associates/JVs P/BV 1 43 64 Tata Sons 20% discount 104 104 Total Equity Value 1,259 2,219 Fair Value (INR/Sh) - Ord Sh Fully Diluted 371 653 Upside (%) -17.4 45.5 Fair Value (INR/Sh) - DVR @ 30% discount 259 456 Upside (%) -5.8 66.2

Source: MOSL

Stock Performance (1-year)

Tata Motors

2 March 2017 5

JLR volumes to grow at 19% CAGR over FY17-19 Robust product pipeline, China resurgence, favorable Fx to drive growth We expect JLR’s volumes (including JV) to grow at a CAGR of 19% over FY17-19, driven

by 14% CAGR for Land Rover and 31% CAGR for Jaguar on the back of the launch of

two new models and six major refreshes.

With a refreshed portfolio – average age estimated at 3.1 years by FY19 v/s 3.8 years

currently – we expect variable marketing spend to trend down.

Continued recovery in China, coupled with launch of Ingenium gasoline (petrol) engine

in gasoline-dominated markets like China and USA, would also support volumes.

With EVs estimated to have 75-100% of incremental market share by 2025, JLR’s early

mover advantage in EVs augurs well. JLR’s I-Pace is scheduled (by September 2018) to

be launched ahead of its German peers.

New launches to keep Jaguar’s momentum intact Jaguar has successfully transformed its product line-up by plugging gaps with

attractive product design and pricing while maintaining consistency of the brand for new launches like XE and F-Pace.

Introduction of two new models (XE and F-Pace) and one major refresh (XF) in the last two years addressed significant product gaps under the Jaguar brand. Jaguar registered a robust growth of 33% in FY16 and 81% YoY in 9MFY17.

The launch of Jaguar’s E-Pace in 4QFY18 and I-Pace in 3QFY19 will be complemented by major refresh of F-Type (4QFY17) and XJ (4QFY19).

We believe Jaguar’s product portfolio is likely to remain young, with strong growth over the next 2-3 years, driven by new product launches and ramp-up in recent launches like SUV F-Pace and XE (US launch with Ingenium petrol engine and potential local manufacturing in China). As a result, we expect Jaguar volumes to grow at a CAGR of ~31% over FY17-19.

Exhibit 3: New launches to boost Jaguar volumes Jaguar Year of launch Type Competitors XE FY16 New Model Mercedes C class, BMW 3 series, Audi A4 XF FY16 Major Refresh Mercedes E class, BMW 5 series,Audi A6 F-Pace FY17 New Model Audi Q5,Mercedes GLC,BMW X3 E Pace 4QFY18 New Model NA F-Type 4QFY17 Major Refresh BMW Z4, Porshe 911 XJ 4QFY19 Major Refresh Mercedes S class, BMW 7 series, Audi A8

Source: Company, MOSL

Land Rover’s portfolio get timely boost through new products and refreshes Launch of one new model and four refreshes over the next two years will

address product fatigue issues that Land Rover has been facing [especially on Range Rover (RR) side].

The Range Rover brand has been witnessing product fatigue (average age of RR product portfolio at 4.2 years in FY17 v/s JLR average of 3.4 years), reflecting in volume decline of 16.5% for RR in 9MFY17 (on top of ~3% decline in FY16).

We expect the launch of new Discovery in 4QFY17, mid-size Range Rover by September 2017 and refreshed Range Rover / Ranger Rover Sport in 4QFY18.

Tata Motors

2 March 2017 6

With more than half of LR’s portfolio being refreshed in the next 12 months, average age of the LR portfolio is expected to reduce sharply from 4.2 years in FY17 to 3.3 years by FY19.

This would translate into LR volume growth of ~14% CAGR over FY17-19, led by recovery in the premium RR portfolio.

Exhibit 4: Major refreshes and new launches to drive LR’s growth over next two years

Model Type Launch Schedule

Segment Competitors

Discovery Sport Refresh 4QFY15 Mid-Size SUV Audi Q5,BMW X3

Discovery 5 Refresh 4QFY17 Mid-Size SUV Mercedes GLE, Audi Q7 and Volvo XC90

Range Rover Velar New Model July-17 Mid-Size SUV Porsche Macan, BMW X4/X6, Mercedes GLE,

Range Rover Refresh End of CY2017 Full Size SUV Mercedes G550,BMW X3,Audi Q7

Range Rover Sport Refresh End of CY2017 Mid-Size SUV BMW X5,Mercedes M Class, Porsche

Cayenne

Defender Refresh End of CY2018 Full Size SUV NA


Exhibit 5: RR Velar priced from GBP44.8k is positioned between Evoque & RR Sport


“Velar is the most car-like Range Rover we’ve done so far, but just as capable. It’s a new type of Range Rover for a new type of customer” Land Rover design director Gerry McGovern Exhibit 6: LR’s product fatigue addressed through new launches

Source: MOSL

4.3 4.6

4.3

3.4 3.8 3.9

4.2

3.6 3.4

FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

LR Avg Age (Yrs)

Since release of teaser image last week, 40k

customers have registered interest in the model

Tata Motors

2 March 2017 7

Exhibit 7: Land Rover volumes have been under pressure due to product fatigue


Exhibit 8: JLR’s portfolio age to further moderate on the back of strong product pipeline

Source: MOSL

Exhibit 9: Favorable product pipeline reflects in increasing contribution of new products

Source: MOSL

JLR well positioned to benefit from rising share of SUVs in luxury car market The share of SUVs is expected to rise further (SUV contribution as a percentage

of luxury cars rose from 32% in CY12 to 35% in CY15), driven by customer preference for SUVs. We believe JLR is better positioned to capitalize on this structural shift, as all its new launches over the next two years are in the SUV segment.

In its key market of China, SUVs account for 40% of the luxury vehicle market, auguring well for JLR due to increasing localization and market reach.

SUVs currently account for ~82% share in JLR’s total volumes, far higher than peers like Daimler (27%), BMW (28%) and Audi (25%).

157 191 260 314 351 394 442

420

2

30 37

21

12 12 12

-5

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

E

LR volumes Growth (%)

3.9 4.4 4.3

3.7 4.1 3.8

3.4 3.2 3.1


Avg Age (Yrs)

45.3

22.1

35.4 36.1 30.8 33.0

43.0 41.9 46.0


Vol. contbn from products launched in last 2 years (% of total vols)

Tata Motors

2 March 2017 8

Exhibit 10: Rising share of SUVs in luxury market augurs well for JLR


Exhibit 11: Share of SUVs in China expected to go up


Exhibit 12: Among luxury car makers, JLR has maximum exposure to SUVs


Market recovery along with Chery JV ramp-up to drive JLR’s China growth China accounts for 25-26% of volumes of luxury car manufacturers and is the

most profitable market. Luxury vehicle growth in China had moderated substantially to ~5% in FY16.

JLR had underperformed in China (16% decline in FY16), due to slow ramp-up products transferred to the Chery JV.

With global luxury car manufacturers focusing on China for growth opportunities, we believe JLR can potentially gain market share, driven by (a) increasing reach from 190 dealers in March 2016 to 250-300 dealerships by mid-FY18, (b) ramp-up of existing models in the JV, and (c) introduction of more China-specific models in the JV (in Phase-2 from FY19 onwards).

We expect lower-priced models like XE, F-PACE and E-Pace (will be launched in 4QFY18) to be introduced in Cherry JV in phase-2, as competing models are already localized.

31.6 32.5

34.9 35.4

2012 2013 2014 2015

SUVs as a % of luxury

18

40

CY 08 Jul-16

Share of SUV in China

25 27 28

82

Audi Mercedes BMW JLR

Contribution from SUV (% of total volumes)

Tata Motors

2 March 2017 9

Exhibit 13: Increasing share of China…

* Sum of volumes for Audi, BMW, Daimler & JLR

Exhibit 14: …driven by strong growth barring FY16


Exhibit 15: The share of premium segment in total PVs is only ~7% in China, indicating further scope for penetration

Source: Daimler presentation, MOSL

Exhibit 16: JLR’s peers have early mover advantage in China

Company, MOSL

Exhibit 17: JLR’s JV contribution in China likely to match global peers

Company, MOSL

20 21

24 25 25 26

FY12 FY13 FY14 FY15 FY16 FY17YTD

Share of China in total Luxury car market *

20

24

15

5

15

FY13 FY14 FY15 FY16 FY17YTD

Luxury car market growth in China

26

21

12 10 9 9 9 7

5 2 1

Germany UK Italy USA France S Korea Russia China Japan Brazil India

48 49 50

63

43

51

61 61

2012 2013 2014 2015

Daimler BMW

31

57 60 60

6 12 12 11

FY16E FY17E FY18E FY19E

JV's contbn (% of total China)JV's contbn (% of total Volumes incl JV)

Tata Motors

2 March 2017 10

Exhibit 18: Increasing dealer reach to aid JLR volumes in China


Exhibit 19: Dealership network to grow at 20% CAGR over FY16-18


Exhibit 20: 2H volumes in China have always been higher than 1H over the past 7 years


Launch of petrol Ingenium engine to drive volumes in USA/China JLR would be launching the petrol (gasoline) Ingenium engine in 4QFY17. This

would be critical for US and China, as they are largely petrol-dominated. The petrol Ingenium engine variants are expected to be rolled out starting with

F-Pace followed by XE. Going forward, JLR plans to increase its offerings to all 2-liter engines (XF, RR Evoque, and Discovery Sport).

It also plans to offer 3-liter Ingenium engines (F-Type and Range Rover) over a period of 15-18 months.

Launch of petrol Ingenium engines in US and China would boost volumes for these models.

207 262

341

447 502

230 290

340 400 430

2011 2012 2013 2014 2015

Daimler Audi

190

250-300

Mar-16 FY18

JLR dealerships in China

39 43 41

46 43

54

43 45

61 57 59

54 57

46

57 55

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E

1H 2H

Tata Motors

2 March 2017 11

Exhibit 21: Gasoline engines account for a majority share in USA and China


Exhibit 22: Benefits of petrol variant of Ingenium engine v/s sourcing Ford engines in JLR

Source: Company

EVs to have ~80% of incremental market share of luxury vehicles by 2025 The share of electric vehicles (EVs) for global luxury car manufacturers is ~1%,

given the constraints on charging infrastructure and high battery costs as compared to traditional IC engines.

However, we believe the following factoring factors will drive acceptance of EVs over the next decade or so: Convergence of the cost of electric batteries with the cost of traditional

engines over the next 5-10 years (refer exhibit 20). Improvement in charging infrastructure due to efforts by both governments

and luxury car manufacturers. Stricter emission norms and regulatory requirements (for example, the

German government’s move to ban IC engines by 2030). Incentives / rebates from government authorities to promote EVs. Launch of new electric vehicle models from major luxury car manufacturers

(refer exhibit 25). JLR’s peers have guided increase in contribution from EVs to ~25% by 2025

(refer exhibit 23), implying incremental market share for EVs at 75-100%.

Fuel consumption: Fuel economy is likley to improve by 15% as compred to equivalent prevously used Ford Engine.

Performance: An improvement of 25% over the current Ford-sourced unit found in the Jaguar XE.

Cost savings: JLR is expected to save costs and increase flexibility by designing a similar engine block for both diesel and gasoline four-cyclinder, which will be built on the same casting line.

Tata Motors

2 March 2017 12

Exhibit 23: Battery costs to converge with conventional power train costs by 2025

Source: Daimler

Exhibit 24: Global luxury car makers bet big on EV opportunity

EV share as a % of total volumes Present 2025

Daimler NA 15-25%

BMW ~2% 15-25%

Audi NA 25%


Exhibit 25: Luxury EVs to have 15-25% penetration by 2025…


Exhibit 26: …translating into 50-97% of incremental volumes by 2025

Assuming 20% penetration of EVs by 2025 Source: Company, MOSL

In EVs, JLR to have early mover advantage over traditional rivals JLR recently showcased its first EV, Jaguar I-Pace (SUV), which would be

launched by September 2018. Given its early mover advantage (v/s global luxury players) with its electric SUV, I-Pace, we expect JLR to capitalize on the rise of electric vehicles. Its early to market advantage should translate into higher market share in EVs.

I-Pace is developed grounds up and is expected to drive more EV models. Apart from EVs, JLR would be launching plug-in hybrids and hybrids especially for its LR range. The management has indicated that ~40% of its portfolio by 2020 would comprise of EVs, plug-in hybrids, and hybrids.

We believe JLR’s would leverage on electric cars for Jaguar and hybrid/plug-in hybrid for LR to comply with future emission norms.

7,669 8,561 9,201

80 451

2,300

2015 2020 2025

Luxury PV (ICE) Luxury EV

1

29

74

2015 2020 2025

EVs - Incremental market share (%)

Tata Motors

2 March 2017 13

Exhibit 27: Jaguar I-Pace scheduled for launch by September 2018


Exhibit 28: JLR to be one of the first luxury car makers to launch an EV

Time line of EV launches Model name Schedule

Daimler EQ FY20

BMW I Series FY20

JLR I-Pace FY19 (Sep-18)

Audi Audi E-tron FY19


Tata Motors

2 March 2017 14

JLR margins: worst of mix & -ve op. leverage behind us… …to expand by 550bp over FY17-19 driven by favorable Fx and op. leverage JLR EBITDA margin deterioration (by 830bp) over FY15-17E has been reflection of

adverse product mix, adverse market mix and negative operating leverage.

Gradual improvement in hedge rates from 2QFY18 and convergence towards spot

rates would reduce hedging losses.

Shift from outsourced engines to captive Ingenium engines (~15% of volumes in FY16

to ~60% by FY19) would enable savings in EBITDA margins loaded by Ford.

A robust 19% volume CAGR would drive operating leverage benefits, as fixed costs are

over 20% of sales.

We conservatively estimate ~550bp expansion in EBITDA margin over FY17-19, driven

by favorable Fx, better mix and operating leverage.

JLR EBITDA margins deterioration largely mix led, not much Fx impact… JLR EBITDA margins have seen significant deterioration (~830bp over FY15-17E

to ~10.6%) mainly due to adverse mix (both product and market) and negative operating leverage.

Contrary to general perception, Fx has limited impacted with estimated net negative impact of just ~140bp due to MTMT of current assets and liabilities, impact of which is diluted by favorable Fx on unhedged portion (~10% of revenues).

Realized Fx hedge loss is largely a notional impact, as it is contra entry to offset recording of revenues at spot rate and not realized Fx rate. However, this does result in optically lower EBITDA margins (as revenues are overstated) without any impact on absolute EBITDA.

Since FY15, JLR has witnessed deterioration in mix due to a) faster growth in Jaguar brand (47% CAGR v/s ~5.5% CAGR in total volumes ex JV), b) decline in most profitable products (RR, RR Sport & Discovery) by ~4% CAGR, and c) decline in China contribution (Ex JV) to ~30% in 1QFY15 to ~12% in 3QFY17 due to ramp-up at Chery JV.

Further, JLR witnessed negative operating leverage (estimated impact at ~250bp) as volumes grew just 5.5% CAGR but its fixed cost increased due to commencement of Ingenium engine plants (estimated utilization at 40% in FY17E), model phase-out cost and higher marketing spend on recent launches which are yet to ramp-up.

Exhibit 29: Large part of margin deterioration due to mix and negative operating leverage


18.9

2.8 3.5

2.5 0.6 1.1

10.6

FY15 -ve Mix (Jag) -ve Mix(China)

-ve Op Lev Fx loss -MTM of CA &

CL

Fx gain(unhedged)

FY17E

Tata Motors

2 March 2017 15

Exhibit 30: Increasing Jaguar share…


…declining RR/RR Sport share…


…coupled with lower China share


…However, favorable hedges and operating leverage to drive ~550bp margin recovery over FY17-19 Our analysis indicates that hedges would contribute meaningfully to EBITDA

margins from 2QFY18. Hence, we estimate Fx to contribute ~220bp to EBITDA margins in FY18E and ~210bp in FY19E.

A robust 19% volume CAGR coupled with ramp-up of captive engine plant (doubling of utilization over FY17-19E) would drive operating leverage benefits. Shift from outsourced engines to captive Ingenium engines (~15% of volumes in FY16 to ~60% by FY19) would enable savings in EBITDA margins loaded by Ford.

We conservatively estimate ~550bp expansion in EBITDA margin over FY17-19E to 16.1%.

We are not yet factoring in for a) potential benefit on margins from in the share of higher margin products (RR + RR Sport + Discovery), b) potential shift of lower margin models (such as XE) to China JV, and c) benefit of improvement in model-to-platform ratio to improve to 3.5 from 1.9 in FY16 on RM cost savings due to higher commonality of parts.

Exhibit 31: Favorable hedges and operating leverage to drive-up margins by 550bp


17 17 16 16 19 20 20 21

29

34 34

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

2QFY

16

3QFY

16

4QFY

16

1QFY

17

2QFY

17

3QFY

17

Jaguar (% of total volumes)

29 30 31

34

29 30 27

26 24 23

22

1QFY

152Q

FY15

3QFY

154Q

FY15

1QFY

162Q

FY16

3QFY

164Q

FY16

1QFY

172Q

FY17

3QFY

17

RR+RR Sport (% of total volumes)30

27 28

15 14 13 11 11 11 12 12

1QFY

152Q

FY15

3QFY

154Q

FY15

1QFY

162Q

FY16

3QFY

164Q

FY16

1QFY

172Q

FY17

3QFY

17

China ex JV (% of total volumes)

13.8 16.1

10.6

0.7 1.7 2.2 1.3 1.2

2.4

FY17E -ve Mix(Jag)

+ve OpLev

Fx gain(hedged)

FY18E -ve Mix(Jag)

+ve OpLev

Fx gain(hedged)

FY19E

Tata Motors

2 March 2017 16

Driver # 1 Favorable Fx to start reflecting from 2QFY18 With ~80% of JLR volumes being exported and imported raw material

accounting for 50% of total raw material cost, Fx fluctuation is the biggest variable influencing EBITDA margin.

In terms of Fx exposure, JLR is a net exporter in USD (~55% of sales) and a net importer in EUR (10-13% of sales).

JLR hedges its forex exposure up to five years, with progressively reducing hedge coverage. Hence, it takes 15-18 months to start reflecting in the P&L for current spot rates.

GBP spot rate has depreciated by 16.5% versus the USD and by ~13% against the EUR since Brexit (June 2016).

Detailed analysis and simulation (refer exhibit 34-35) based on JLR’s hedging policy gives us confidence of reflection of favorable hedge rate from 2QFY18 onwards.

We estimates realized hedge rate for GBP/USD at 1.52 for FY17, 1.45 for FY18, and 1.39 for FY19 (v/s spot rate of 1.24). This would translate into EBITDA margin expansion of ~230bp each in FY18/FY19, assuming constant currency.

Exhibit 32: Share of gross exports (as a % of revenue)


Exhibit 33: Share of gross imports (as a % of revenue)


Exhibit 34: EBITDA margins at spot Fx rate were at ~16.3% in 3QFY17


GBP, 22

Dollar , 59

Euro, 20

Euro, 31 GBP, 28

Dollar , 3

17.9

13.5 15.6

18.3 16.1 15.9 16.3

16.4

12.2 14.4

16.2

12.3 10.3 9.3

1Q 2Q 3Q 4Q 1Q 2Q 3Q

FY16 FY17

EBITDA margins (at spot Fx rate) Reported EBITDA margins

Tata Motors

2 March 2017 17

Exhibit 35: Being net exporter, weak GBP against USD augurs well…

Source: Bloomberg, MOSL

Exhibit 36: …but for hedging which would result in gradual improvement in realized hedge rate by 2QFY18

Source: MOSL

Exhibit 37: Weaker GBP against EUR hurts imports…

Source: Bloomberg, MOSL

Exhibit 38: …but hedging would defer & dilute the impact

Source: MOSL

Driver # 2 Mix Improvement within LR driven by major refreshes coupled with

potential shift of low margin products to China JV An upgrade of RR, RR Sports and Discovery over the next 12 months is likely to

increase contribution of higher margin models in JLR’s product portfolio. This coupled with potential shifting of lower margin products like XE to Chery JV

(in phase-2 from FY19 onwards) would also aid mix improvement. We are not factoring in for any benefit from this. Infact, we are factoring in for

further ~200bps adverse impact for increase in Jaguar’s contribution from FY17E to ~38% by FY19E.

Exhibit 39: High margin models to account for 39% of total sales in FY19

*Include RR, RR Sport, Mid-size RR & Discovery Source: Company, MOSL

1.67

1.53

1.31

1.24

1.2

1.3

1.4

1.5

1.6

1.7

1QFY

152Q

FY15

3QFY

154Q

FY15

1QFY

162Q

FY16

3QFY

164Q

FY16

1QFY

172Q

FY17

3QFY

174Q

FY17

1QFY

182Q

FY18

3QFY

184Q

FY18

1QFY

192Q

FY19

3QFY

194Q

FY19

USDGBP Spot rate

1.59 1.58 1.52

1.45 1.39

1.3

1.4

1.5

1.6

1.7

1QFY

15

3QFY

15

1QFY

16

3QFY

16

1QFY

17

3QFY

17

1QFY

18

3QFY

18

1QFY

19

3QFY

19

USDGBP Hedge Rate Avg Hedge Rate for FY

1.27

1.38

1.27

1.16

1.1

1.2

1.3

1.4

1.5

1QFY

152Q

FY15

3QFY

154Q

FY15

1QFY

162Q

FY16

3QFY

164Q

FY16

1QFY

172Q

FY17

3QFY

174Q

FY17

1QFY

182Q

FY18

3QFY

184Q

FY18

1QFY

192Q

FY19

3QFY

194Q

FY19

EURGBP Spot rate

1.19

1.24 1.25 1.23 1.23

1.10

1.15

1.20

1.25

1.30

1QFY

15

3QFY

15

1QFY

16

3QFY

16

1QFY

17

3QFY

17

1QFY

18

3QFY

18

1QFY

19

3QFY

19

EURGBP Hedge Rate Avg Hedge Rate for FY

42 40

35

38 39

FY15 FY16 FY17E FY18E FY19E

High margin models (as % of total of volumes) *

Tata Motors

2 March 2017 18

Exhibit 40: JLRs strong product pipeline to drive reduction in average age of the portfolio and keep variable marketing spend under control


Driver # 3 Operating leverage benefits to boost EBITDA margin, going ahead

JLR’s sales volumes are expected to register 20% CAGR (ex JV) over FY17-19, led by new launches as well as supported by ramp up of recent launches.

We expect significant operating leverage benefits to come over the next two years, driving down fixed cost (as a percentage of sales) by ~290bp to 21.5% in FY19.

Operating leverage benefits are despite budgeting for 17.5% CAGR in staff cost and 19.5% CAGR in other expenses (ex Fx) as Slovakia plant starts operations in FY19 and have couple of big launches.

Further, over the next 1-2 years, JLR would be diversifying its capacity to low cost countries like Brazil (FY17) and Slovakia (FY19). We expect the share of low cost countries (as a percentage of total capacity ex JV) to grow to 33% by FY21.

Exhibit 41: Benefit of operating leverage to reduce fixed cost as a % of sales


3.9 4.4 4.3

3.7 4.1 3.8

3.4 3.2 3.1


Avg Age (Yrs)

20.6 21.3 20.0 21.4 23.2 25.6 24.2 21.7

FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Fixed cost (pre Fx) as a % of sales

Tata Motors

2 March 2017 19

Exhibit 42: JLR’s new manufacturing facilities offer significant savings in manpower cost


Exhibit 43: Share of low cost plant to go up to ~33% by FY21


Driver # 4 Shift to captive Ingenium engines to aid EBITDA margin

Prior to launching Ingenium engine from April 2015, JLR was entirely dependent on Ford for engines.

JLR has already invested GBP500m in phase-1 for engine capacity of ~250,000. It is further investing ~GBP500m in phase-2 to double capacity to ~500,000. While it started with the 2.0 liter 4-cylinder diesel engine from April 2015, it will launch 2.0 liter petrol engines in 4QFY17.

Currently, Ingenium diesel engines are mounted in for XE, XF, RR Evoque and Discovery Sport. JLR plans to launch gasoline Ingenium engines in above models and expand its offerings to other models. It also expects to introduce Ingenium engines in the 3.0 liter 6-cylinder configuration.

We expect the Ingenium engine’s plant utilization to ramp up from ~24% in FY16 to ~80% by FY18, and help to reduce dependence on engines sourced from Ford to <50% by FY19 (from over 80% in FY17E).

We believe the shift to in-house Ingenium engine manufacturing could add ~70bp to EBITDA margin by FY19, driven by operating leverage and savings on margins on engines sourced from Ford.

Exhibit 44: Launch of Ingenium engines in gasoline variant and new models to increase utilization


Exhibit 45: Ingenium engine (2.0 liter) based models to contribute over 50% of volumes FY18 onwards


20

7.4 7.5

UK Brazil Slovakia

Hourly compensation costs in manufacturing (GBP)

475 575 662 674 712

862 974

0 0 2 4 9

25

33

FY15 FY16 FY17E FY18E FY19E FY20E FY21E

Total Capacity (ex JV, '000 units)

Share of low cost plant (% of total cap ex JV)

60 98 328 400

24

39

66

80

FY16 FY17E FY18E FY19E

Ingenium volumes Utilization

12 19

54 53

FY16 FY17E FY18E FY19E

Ingenium engines (as a % of total volumes)

Tata Motors

2 March 2017 20

Modular platform execution on track; benefits of lower cost and capex to follow JLR’s shift to modular platform strategy is likely to (a) optimize product

development cost, (b) reduce time to market, and (c) derive economies of scale. Based on JLR’s product pipeline, we expect the model-to-platform ratio to

improve to 3.5x, with 14 models on four platforms in FY19. About 97% of JLR’s FY19 volumes are likely to come from the modular platform. We have not factored in savings from platform commonality in our estimates.

While we are yet to factor in for any benefits from modular platform strategy, we believe it would result not just in lowering capex intensity, but also in RM cost savings due to higher commonality of parts.

Exhibit 46: Gap between number of platforms and modular platform to contract with new model launches


Exhibit 47: Model-to-platform ratio to improve to 3.5 in FY19 from 2.2 in FY17


Exhibit 48: New model launches in FY19 to take model-to-platform ratio to 3.5 in FY19


Exhibit 49: Average volumes per platform to rise, going forward


JLR’s capex intensity peaking out; FCFF to improve sharply Capex for the Slovakia plant is estimated to be GBP1.5b (including phase-2), with

a major chunk to be invested over FY17-19. We believe post Slovakia commissioning, capex intensity for JLR would peak out, with no major expansion plans in the pipeline.

Further, phase-2 of capacity addition of ~70k (to 200k) at Chery JV by mid-CY18 would also free up capacity in the UK.

8 8 9

7 6

5 4

1 2 2

3 3 3 3

FY09 FY14 FY15 FY16E FY17E FY18E FY19E

# of Platforms Modular platform

8 8 9

7 6

5 4

9 10

11 13 13

14 14


# of Platforms # of Models

1.1 1.3 1.2

1.9 2.2

2.8

3.5


Models:Platform (x)

79,8

46

144,

766

161,

695

160,

279

182,

479

219,

565

272,

114

32

67 69 88 92 96 97


Avg vols per modular platform% of volumes from modular platform

Tata Motors

2 March 2017 21

Also, JLR’s contract manufacturing agreement with Magna Steyr for producing JLR models at the latter’s Graz, Austria plant would reduce the need to put up new capacity in the medium term.

Lastly, the modular platform strategy would also reduce capex intensity. Our interactions with industry participants indicate that the average cost of developing a platform is USD600m-700m, whereas the average cost of developing a model on an existing platform is USD100m-150m.

Hence, we find credibility in the management’s guidance of reduction in capex intensity from the current ~14% of sales to 10-12% by FY20.

Improvement in operating performance and lower capex intensity would translate into higher FCF conversion at ~85% by FY19 (v/s average of ~30% in last 3 years) and FCF (as a percentage of revenue) to 7% in FY19 (v/s average of <2% in last 3 years).

Exhibit 50: Capex to moderate post full commissioning of Slovakia plant by FY19E


Exhibit 51: JLR’s capacity (including JV) to grow at 11% CAGR over five years


Exhibit 52: JLR’s capex (including R&D) to fall in line with global peers

Capex (incl R&D) as % of sales 2014 2015 Target

Daimler 7.6 8.3 10.4

BMW 9.2 9.8 10.5

Audi 13.5 13.2 JLR 13.8 14.4 10-12


Exhibit 53: FCFF to see a steep rise, as capex intensity reduces


and operating performance improves


1,591 2,048 2,680 3,147 3,135 3,750 4,000 4,500

11.8 13.0 13.8 14.4 14.1 14.8

13.2 11.7


Capex+R&D(GBP M) Capex+R&D as % of revenues

475 575 650 650 650 650 650

130 130 130 200 200 200 200 12 24 24 24 24 38

188 300 605

705 792

874 912 1,062

1,174

FY15 FY16 FY17E FY18E FY19E FY20E FY21E

UK China Brazil Slovakia Total

1090 579 1066 857 319

-17

1149 2723

8.1

3.7

5.5 3.9

1.4 -0.1

3.8

7.1


FCFF(GBP M) FCFF as a % of revenues

71

48 57

42 24

-2

61

85


FCFF Conversion (as % of PAT)

Tata Motors

2 March 2017 22

India business: Several levers for recovery Key drivers: Demand revival I Product lifecycle I Management initiatives While domestic CV volumes are ~10% off from the peak of FY12, a confluence of

several factors creates uncertainty for FY18.

TTMT has initiated a new, leaner organization structure from April 2017, reducing the

number of management layers from 14 to five to improve speed of decision-making.

It has unveiled a new strategy for the PV business aimed at making it one of India’s

top-3 PV players with sustainable financial performance and exciting innovations by

2019.

Also, it has created a new sub-brand/vertical – ‘TAMO’. TAMO aspires to be an agile,

ring-fenced vertical, operating in an incubating environment for new technologies,

business models and partnerships to define future mobility solutions.

Reasonable success of recent launches and visibility of an exciting product pipeline

gives us confidence of potential EBITDA breakeven of the PV business. PV business

EBITDA breakeven could add 6-7% to our SOTP value.

M&HCV: Confluence of several factors creates uncertainty for FY18 After recovering from a downturn, with replacement demand-driven ~16%

CAGR over the last three years, domestic M&HCV volumes have been under pressure in FY17. This is because of a lack of economic recovery, high base of 1HFY16 (due to pre-buying ahead of mandatory ABS implementation from October 2015) and demonetization impact. This is reflected in ~4% decline in truck volumes in 9MFY17. Even after recovery from the lows of FY14, domestic M&HCV volumes are ~10% lower than the peak of FY12.

Several factors are likely to influence CV demand in the short to medium term: pre-buying, GST, scrappage scheme, policy on rated load capacity, and DFCC.

Pre-buying: Given that BS-IV implementation from April 2017 would increase the cost of CVs by 8-10%, there is anticipation of strong demand in 4QFY17, led by pre-buying. However, the already low fleet utilization of 65-70% could result in muted CV demand at least for 1HFY18.

GST from July 2017: GST is expected to be implemented from July 2017. This should ease bottlenecks in transportation and free up fleet capacity by reducing inefficiencies and time wastage at check posts. Our industry interactions indicate freeing up of capacity by 5-7%, assuming no wastage of time at the check posts. This could reduce demand for CVs in the initial couple of years.

Retirement of CVs older than 15 years: The central government has been considering a scheme to retire CVs older than 15 years by offering incentives. While we await nuances of the scheme (voluntary or mandatory, quantum of incentives, timeline of implementation, etc), we estimate the population of CVs older than 15 years at 0.8m-1m units (v/s current volumes of ~0.7m units).

Policy on rated load capacity: Overloading of trucks is prevalent in India – experts estimate 30-40% overloading rate. Given the risks posed by over-loaded vehicles, the central government intends to curb overloading. This could be huge positive for the CV industry, as it would reduce fleet capacity by 30-40%.

Tata Motors

2 March 2017 23

Dedicated freight corridor: DFCC is expected to be operational by FY20, posing a threat to road transport. Roads have been gaining share consistently (by ~750bp in the last 10 years to ~68%) due to capacity constraints and inefficiencies of rail transport. DFCC would enable partial recovery of the lost market share.

Given so many uncertain variables at play, CV demand estimation is difficult. Exhibit 54: Current recovery in CV volumes largely led by replacement demand, without any support from economic recovery

Assuming no Cash for Clunkers scheme in FY18E Source: Company, MOSL

Exhibit 55: Recent weakness in M&HCV volumes can be attributed to several one-offs


0

120

240

360

480

FY95

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

E

FY18

E

M&HCV ('000 units)

CAGR 22%

CAGR -27%

CAGR 22%

CAGR 22%

CAGR -23% CAGR

23%

CAGR 6%

15

25

35

45

55

Apr

May Jun Jul

Aug

Sep

Oct

Nov De

c

Jan

Feb

Mar

FY15 FY16 FY17

Adverse base due to weak monsoon in 2QFY16 and pre-buying ahead of mandatory ABS

Expect sharp recovery in 4QFY17 due to pre-buying

Impact of Demonetization

Drivers of CV recovery since FY14… • Improvement in fleet operators’

health due to diesel price correction

• Moderation in interest rates • Replacement demand, after

deferment of replacement over FY12-14

…despite headwinds like • Weak industrial production and

economic activity • Weaker mining sector • Weakness in urban markets • Two back-to-back poor monsoons • Weak bus demand from STUs

Key factors impacting CV volumes in 9MFY17 • Normal monsoon in 1HFY17 v/s

weak monsoon in FY15/16 resulted in lower fleet utilization and CV demand

• Pre-buying in 2QFY16 due to mandatory ABS from Oct-15

• Decline in freight rates partly due to seasonality and partly due to weakness in freight availability

• Weakness in rural market • Impact of demonetization

Tata Motors

2 March 2017 24

Exhibit 56: Multiple variables influencing CV cycle

Source: MOSL

New, leaner organizational structure from April 2017 TTMT will roll out a new organizational structure from April 2017 for the

standalone business, with the objective of faster and effective decision-making and sharper customer focus.

The new management structure allocates roles based on product lines and reduces the layers from 14 to 5.

The new flat organization, which eliminates layers of middle management and is internally called OE or Organization Effectiveness, will empower business units with clear accountability and strengthen the functional leadership.

New PV strategy to profitably enter top-3 in domestic PV industry Under its new PV strategy, TTMT aims to consolidate its platforms from the

current six to two over the next two years, thereby reducing development cost, improving time to market, and deriving efficiencies.

TTMT foresees strong demand growth in the hatchback and SUV segments. Further, it aims to be among the top-three domestic PV players, with

sustainable financial performance and exciting innovations by 2019. Commenting on its new PV strategy, Mr Mayank Pareek, President – PV

Business: “In line with our new PV strategy, our portfolio will include a mix of brand enhancing products and ones that are well aligned to the rising aspirations of the different target customer segments. Our new architectural approach supports our effort to reduce complexity, enables future technologies and ensures global relevance.”

Click here for interesting

video on TTMT’s Advance Modular Platform

https://www.youtube.com/watch?v=1NvAFD_vf7w&feature=youtu.be




Tata Motors

2 March 2017 25

Exhibit 57: TTMT’s PV business – six focus areas


TAMO – New vertical to bring in adaptability, agility and start-up culture TTMT has announced its new PV strategy and introduced its new sub-

brand/vertical – ‘TAMO’. TAMO aspires to be an agile, ring-fenced vertical, operating in an incubating

environment towards new technologies, business models and partnerships in order to define future mobility solutions.

TAMO as a new, separated vertical will operate in the first step on a low volume, low investment model to provide fast-tracked proves of technologies and concepts.

Cars sold under the TAMO brand will deliver the proof of concept and if the response is good, the model or parts of the car or technologies involved or the manufacturing processes will be absorbed by TTMT, which will continue to focus on building high volume products.

The first product developed by TAMO will be premiered at the Geneva Motor Show in March 2017.

TAMO will act as an open platform to network with global startups and leading tech companies to get access to trends, innovations and solutions for the design of exciting future products and services.

TAMO will provide a digital ecosystem, which will be leveraged by TTMT to support the mainstream PV business in the future.

According to TTMT’s CEO and MD, Mr Guenter Butschek, “Our game plan addresses six themes – topline improvement, cost management, structural improvements, customer centricity, new mobility solutions and organizational effectiveness. The mindset of people in TAMO will be very different from that of those in Tata Motors, manufacturing cars in large volume. TAMO will have a totally different ecosystem.”

Dr Tim Leverton, President and Head – Advanced & Product Engineering on TAMO: “With TAMO, we are starting a new era. The idea is to find new and agile ways of innovating and experimenting. We will apply within TAMO also, new ways of working because leadership is all about time to market.”

Tata Motors

2 March 2017 26

Exhibit 58: TAMO – new vertical focusing on future mobility solutions


Turnaround on the cards for the PV business? TTMT’s PV business has been a drag on standalone operations. We estimate PV

business EBITDA loss at INR12b-14b in FY16 (v/s S/A EBITDA of INR27.4b). Also, the PV business was investing INR15b-17b annually in the last two years (which is expected to continue in the foreseeable future) in product development.

TTMT’s PV sales volumes declined at a compounded annual rate of 13% over the past five years (FY11-16) due to factors such as (a) product fatigue in both cars and UVs, (b) failed new launches (Zest and Bolt), as they were based on old platforms, and (c) entry of new players increasing competitive intensity.

After a vacuum in new product launches since the Nano launch in 2008, TTMT’s PV business is back on track with an exciting product pipeline. Apart from recent launches of Tiago (hatchback) and Hexa (UV), it plans to launch two new products annually till 2020.

We believe building blocks are Restoring missing parts for the PV business turnaround through (a) an exciting product pipeline, (b) new business strategy based on reducing complexities and capex intensity of the business, and (c) improving organizational structure for greater agility and responsiveness.

TTMT’s PV business currently operates at ~30% utilization and has an EBITDA breakeven point of 50-55% utilization. Reasonable success of recent launches and visibility of an exciting product pipeline gives us confidence of potential EBITDA breakeven of the PV business. PV business EBITDA breakeven could add 6-7% to our SOTP value.

Tata Motors

2 March 2017 27

Exhibit 59: Launch of new products could boost market share, going forward


Exhibit 60: TTMT’s PV business plans to launch two new models per annum till 2020 Product pipeline

Timeline Segment Competitors Segment Size

('000 units)

Tiago Apr-16 Hatchback Hyundai Grand i10, Maruti Swift, Ford Figo 593

Hexa Jan-17 UV Toyota Innova, M&M XUV 500 187

Kite 5 1QFY18 Sedan Maruti Dzire, Hyundai Xcent, Honda Amaze 403

Nexon 2HFY18 Compact UV Maruti Brezza,Honda BRV, Ford Eco Sport 369

X451 1HFY19 Premium Hatchback Maruti Baleno, Hyundai i20 230


Exhibit 61: Ramp-up of new models to take utilization levels closer to breakeven by FY19


Exhibit 62: New launches to help PVs break even by FY19?


13 15 16 17 17 16

15 15 15 14 14 12

8 6 5 6

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

YTD

TTMT's Dom PV Mkt Sh (%)

2 2 2 2 2 2 2

3 3 3 3 3

4 4

5 5

FY02 FY05 FY08 FY11 FY14 FY17YTD

Rank in Dom PV Ind. (#)

242 306 322 229 145 138 152 165 225 287

67

50 53

38

24 23 25 27 37

47

FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E

Volumes ('000 units) Utilization (%)

12,625

4,000 3,750

3,500 2,500 3,229

23,146

FY16 monthlyvols

Tiago Nexon Kite 5 Hexa Decline inexistingmodels

FY19 monthlyvols?

FY16 FY19

Tata Motors

2 March 2017 28

Exhibit 63: We estimate EBITDA losses for TTMT’s PV business at INR13b-15b

INR M FY16 FY17

Total PV Volumes 151,559 163,943

Growth (%) 10.1 8.2

Blended PV Realizations (INR/unit) 355,271 358,289

Revenues 53,845 58,739

Gross profit 6,461 7,049

Gross Margins (%) 12.0 12.0 Variable cost 4,846 5,580 Variable costs as % of sales 9.0 9.5 Fixed cost 14,758 16,234 Growth (%) 5 10 R&D Expensed 646 764

% of sales 1.2 1.3

EBITDA -13,789 -15,529

EBITDA Margins (%) -25.6 -26.4

Source: MOSL

Exhibit 64: Gross margins earned by similar sized peers of TTMT PV business are at 11-16%


2.3

15.7 19.7 18.1

28.4

-1.5

17.2 19.5 25.3

29.8

10.8

20.0

28.7 32.6

General Motors Ford Hyundai Honda MSIL

FY14 FY15 FY16

Tata Motors

2 March 2017 29

Restoring missing parts Estimate ~134% CAGR in EPS over FY17-19

After 2 years of turbulence for TTMT, we believe worst is behind and things are Restoring missing parts for both JLR and India business.

JLR is poised for sharp recovery, driven by (a) strong product pipeline, (b) beneficial Fx movement, (c) favorable operating leverage, and (d) improved FCF conversion. The India business is interestingly positioned with several levers to drive turnaround for both PVs and CVs.

We estimate 134% consolidated EPS CAGR over FY17-19 (albeit on a low base, after 46% CAGR decline over FY15-17E).

We maintain Buy with a target price of INR653 (FY19E SOTP-based). We value JLR at 3.5x EV/EBITDA and the Indian business at 8x EV/EBITDA. TTMT is one of our top picks in Autos.

Strong product cycle positioning for all major JLR brands to aid volumes in FY18-19E: With ~50% of volumes coming from new/refreshed over the next two years, as it launches two new products, 6 refreshes and foray into the EV space before its peers. We expect JLR's volumes (including JV) to grow at a CAGR of 19% over FY17-19, driven by 14% CAGR for Land Rover and 31% CAGR for Jaguar on the back of the launch of two new models and six major refreshes.

JLR’s profitability has many levers: JLR has several levers, both cyclical and structural, in the form of (a) favorable Fx, as realized hedge rates improve from 2QFY18, (b) better product mix (higher share of RR, RR Sport, and Discovery), (c) operating leverage, (d) cost savings on modular platform on full rollout of modular strategy, and (e) manufacture of Ingenium engines in-house v/s sourcing engines from Ford. The convergence of the multiple factors stated above is expected to drive up EBITDA margin by 550bp from 10.6% in FY17E to 16.1% in FY19E.

PV business turnaround on the anvil? : With Tiago having good start and three new launches scheduled over FY18, we believe the worst is behind for the PV business. TTMT’s PV business’ estimated EBITDA loss in FY17 was at INR15.5b, with current utilization at 30%. Breakeven point for the PV business is estimated at 55% utilization levels, which could be achieved in next 2-3 years. This could add 6-7% to our FY19 SOTP.

Strong margins, reduced capex intensity to result in strong FCFF and RoE improvement: Post commissioning of the Slovakia plant, capex intensity for JLR is likely to reduce from FY19. This coupled with improvement in operating performance would improve FCFF in FY18 and FY19. Consolidated RoE should improve by ~390bp over FY16-19E to 22.2%.

Valuation and view: JLR is poised for sharp recovery, driven by (a) promising product pipeline, (b) beneficial Fx movement, (c) conducive mix, (d) favorable operating leverage, and (e) improved FCF conversion. The India business is interestingly positioned with several levers to drive turnaround for both PVs and CVs. We estimate 134% consolidated EPS CAGR over FY17-19 (albeit on a low base). Our EPS estimate for FY19 is ~28% higher than the consensus EPS, but FY18 is lower by ~17%. The stock trades at 12.7x/6.4x FY18E/FY19E consolidated EPS. We maintain Buy with a target price of INR785 (FY19E SOTP-based). We value JLR at 3.5x EV/EBITDA and the Indian business at 8x EV/EBITDA.

Tata Motors

2 March 2017 30

Key Risk: Import duties in US can hurt competitive positioning in short term Proposal to impose border/import tax in USA could hurt competitive positioning

of JLR, as it doesn’t have manufacturing presence in USA (unlike BMW and Mercedes Benz).

USA accounts for ~23% of volumes and is estimated to be the most competitive markets resulting in lowest profitability.

While we await details of quantum and nature of import tax, given both BMW (~28% of US volumes locally manufactured) and Mercedes (~42% of volumes locally manufactured), JLR’s competitive positioning and profitability from US business could be adversely impacted over 12-18 months (time take to set-up assembly unit).

Exhibit 65: JLR’s competitive positioning could weaken in US if import tax is levied


Exhibit 66: Tata Motors – Restoring missing parts JLR FY14-16 FY17-19E

# New launches 5 8 # SUV launches 3 6 GBP/USD (Avg hedge rate) * 1.55 1.42 Capex + R&D as % of sales 14.2 13.3 Model to platform ratio 1.4 2.8 FCF conversion (% PAT) 41 73 Standalone Change in CV market share -10 Change in PV market share -0.1 * for FY16-17E and FY18-19E


0 0

28

42

JLR Audi BMW Mercedes

CY16 (% of volumes from US Mfd models)

Tata Motors

2 March 2017 31

Exhibit 67: Tata Motors – SOTP-based fair value

INR B Valuation Parameter Multiple (x) FY18E FY19E

Tata Motors - Standalone EV/EBITDA 9.0 199 261 JLR (Adj for R&D capitalization) EV/EBITDA 3.5 948 1,509 JLR - Chery JV EBITDA Share EV/EBITDA 3.5 105 118 HV Axles EV/EBITDA 8.0 8 8 HV Transmission EV/EBITDA 8.0 6 6 Tata Technologies EV/EBITDA 8.0 48 54 Tata Daewoo EV/EBITDA 5.0 20 23 Total EV

1,334 1,978

Less: Net Debt (Ex FCCB & TMFL) 258 -35 Add: Other Investments Tata Motors Finance P/BV 1 37 39 Other Associates/JVs P/BV 1 43 64 Tata Sons 20% discount 104 104 Total Equity Value 1,259 2,219 Fair Value (INR/Sh) - Ord Sh Fully Diluted 371 653

Upside (%) -17.4 45.5 Fair Value (INR/Sh) - DVR @ 30% discount 259 456

Upside (%) -5.8 66.2

Source: MOSL

Tata Motors

2 March 2017 32

Bull and bear cases Bull case Better than anticipated volumes of E-Pace, I-Pace and refreshes of Discovery, RR

and RR Sport could boost overall JLR volumes (ex JV) growth to 23.8% CAGR over FY17-19 (v/s base case of ~20% CAGR).

Realization could grow by 5% CAGR over FY17-19E, driven by better mix (incremental growth driven by higher priced LR model and premium Jaguar models), faster growth in China and further GBP depreciation (by 5%).

Revenue growth could jump to 29% CAGR (v/s ~23% CAGR in base case), led by both volume growth and realization support.

EBITDA margin could reach 18% in FY19 (v/s 16.1% in base case) driven by better mix, operating leverage and further depreciation of the GBP.

This would translate into TP of ~INR825 (~84% upside) based on FY19 SOTP, at same target multiples as in base case (3.5x for JLR and 8x for India business).

Bear case JLR volumes (ex JV) could get impacted due to (a) Import tax in USA, (b) weak

response to new model launches and (c) increasing competitive intensity. This would translate into volume CAGR of just ~8.8% over FY17-19.

Realization growth could also moderate to 1% over FY17-19 due to (a) weaker mix, (b) higher variable marketing spend due to higher competitive intensity and (c) ~10% GBP appreciation.

As a result, EBITDA margin expansion could be lower than base case as benefit of favorable hedges is diluted by (a) weaker mix, (b) higher marketing spend, (c) GBP appreciation, and (d) negative operating leverage benefit.

This would imply FY19 SOTP based TP of ~INR410 (~9% downside), at same target multiples as in base case.

Exhibit 68: Scenario Analysis - FY19 JLR

GBP M Base Case Bull Case Bear Case

Volumes (Ex JV, units) 752,370 802,506 620,806

Monthly run-rate (units) 62,698 66,875 51,734

Growth (%) 24 33 2 GBP/USD 1.392 1.385 1.409

Realizations (GBP/unit) 51,094 53,350 49,466 Growth (%) 2 7 -1

Sales 38,442 42,813 30,709

EBITDA 6,196 7,716 4,037

EBITDA Margins (%) 16 18 13 PAT 3,195 4,395 1,489

Growth (%) 70 134 -21 TTMT Consol EPS (INR) 70.1 100.2 27.4

EPS CAGR (FY17-19E) 134.0 179.7 46.4 TTMT SOTP TP (INR/Share) 653 825 410

Upside (%) 46 84 -9

Source: MOSL

Tata Motors

2 March 2017 33

SWOT analysis

Strength

Weaknesses

Opportunities

Threats

JLR’s strength in fast-growing SUV segment, with differentiated positioning.

JLR’s favourable product lifecycle, targeting white spaces and niche areas.

Land Rover’s strong brand equity and competitive positioning enables pricing power.

Strong brand equity and market leadership in India CV business.

Relative weakness in luxury cars due to smaller product portfolio.

Concentrated manufacturing footprint, though the management has taken initiatives to diversify.

India PV business has weak positioning in a highly competitive market, resulting in significant drag on standalone financials.

With several new products in the luxury car segment, Jaguar can potentially narrow the gap with peers.

Opportunity to grow faster in China by increasing locally produced models and expanding reach.

Early mover advantage in EVs among mainstream luxury car companies, as Jaguar I-Pace is likely to be launched ahead of its peers.

Modular platform strategy to result in lower capex intensity and high economies of scale.

Exciting product pipeline in India PV business can drive reduction in losses.

Stricter emission norms could specifically challenge JLR’s SUV business.

Faster acceptance of electric vehicle revolution could bring in more competitors like Tesla, Lucid Motors, etc.

India CV business’ increasing competitive intensity can potentially hurt market share and lower sustainable margins.

Tata Motors

2 March 2017 34

Tata Motors| Story in Charts: Strong recovery in EPS with ~134% CAGR

Exhibit 69: Expect 12% volume CAGR in JLR (including JV), led by strong growth in FY17 on introduction of Jaguar XE and F-Pace


Exhibit 70: Margins to remain stable, as volume ramps-up


Exhibit 71: JLR to remain FCF-positive, despite high capex plans (GBP m)


Exhibit 72: S/A business to recover on economic revival


Exhibit 73: S/A margins to improve on volume recovery


Exhibit 74: Consol EPS CAGR of 134% over FY17-19E


314

372

430

471

544

597

691

29.1

18.3 15.5

9.5

15.6

9.8

15.6

FY12 FY13 FY14 FY15 FY16 FY17E FY18E

JLR volumes (incl JV; '000 units)

1,98

9

2,33

1

3,39

3

4,13

1

3,31

3

2,68

2

4,18

5

14.7 14.8 17.5

18.9

14.9

10.6

13.8

FY12 FY13 FY14 FY15 FY16 FY17E FY18E

EBITDA (GBP m) EBITDA margin (%)

2,50

0

2,42

9

3,42

2

3,62

7

3,12

9

3,32

0

4,74

9

6,77

3

-1,5

42

-2,6

09

-2,7

36

-2,6

41

-2,9

47

-3,3

38

-3,6

00

-4,0

50

958

-180

686

986

182

-17

1,14

9 2,72

3


CFO Capex FCF

353

292

402

509

585

581

421

365

381

391

427

476

233

214

266

328

338

229

145

138

152

164

224

285

FY08

FY09

FY10

FY11

FY12

FY13

FY14

E

FY15

E

FY16

E

FY17

E

FY18

E

FY19

E

CV Volumes ('000 units) PV Volumes ('000 units)

44 21

(5) (8)

27 20 25 33

8.1

4.8

-1.4 -2.2

6.5 4.6 4.9 5.5

FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E

EBITDA (INR b) EBITDA Margins (%)

37.5 31.2 44.1 43.6 36.9 12.8 35.5 70.1

28.9 -16.8

41.3 -1.1 -15.5

-65.4

178.3

97.5

FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E

EPS (INR) Growth (%)

Tata Motors

2 March 2017 35

Key operating metrics

Exhibit 75: Snapshot of Revenue model

000 units FY12 FY13 FY14 FY15E FY16E FY17E FY18E FY19E JLR

Jaguar 54 58 79 76 102 177 216 304

Growth (%) 2.0 7.0 37.2 -3.5 33.5 73.3 22.2 40.5 % of Total JLR Vols 17.2 15.5 18.4 16.3 20.0 33.8 35.7 40.4

Land Rover 260 314 351 394 442 420 474 542 Growth (%) 36.6 20.7 11.6 12.4 12.2 -4.9 12.8 14.3 % of Total JLR Vols 82.8 84.5 81.6 83.7 86.8 80.3 78.3 72.0

Total Volumes 314 372 430 471 509 524 606 752 Growth (%) 29.1 18.3 15.5 9.5 8.2 2.8 15.6 24.2

ASP (GBP '000/unit) 43 42 45 46 44 48 50 51 Growth (%) 6.1 -1.3 6.3 3.0 -6.2 11.0 3.5 2.0

Net JLR Sales (GBP b) 14 16 19 22 22 25 30 38 Growth (%) 36.9 16.8 22.8 12.8 1.6 14.1 19.7 26.7

DOMESTIC

MH&CVs 221 153 122 143 176 178 192 211 Growth (%) 3.4 -31.1 -19.7 16.5 23.6 1.1 7.7 9.6

LCVs 364 429 299 222 205 212 235 265 Growth (%) 23.3 17.8 -30.3 -25.8 -7.7 3.7 10.8 12.8

Total CVs 585 581 421 365 381 391 427 476 Growth (%) 14.9 -0.7 -27.5 -13.5 4.6 2.5 9.4 11.4

Total PVs 338 229 145 138 152 164 224 285 Growth (%) 3.1 -32.2 -36.5 -5.3 10.1 8.2 36.4 27.5

Total Volumes 923 810 567 502 533 555 651 761 Growth (%) 10.3 -12.2 -30.1 -11.4 6.1 4.1 17.4 16.9

ASP (INR 000/unit) 588 552 605 723 795 794 788 780 Net S/A Sales (INR b) 543 447 343 363 424 440 513 594

Growth (%) 13.0 -17.6 -23.4 5.9 16.7 3.9 16.6 15.8

Tata Motors

2 March 2017 36

Financials and Valuations

Income Statement (Consolidated) (INR Million) Y/E March 2012 2013 2014 2015 2016 2017E 2018E 2019E Total Income 1,656,545 1,888,176 2,328,337 2,631,590 2,755,611 2,803,256 3,211,853 3,993,226 Change (%) 35.6 14.0 23.3 13.0 4.7 1.7 14.6 24.3 Expenditure 1,419,540 1,622,487 1,954,308 2,210,452 2,353,245 2,501,682 2,786,762 3,382,320 EBITDA 237,005 265,689 374,029 421,138 402,367 301,574 425,092 610,907 % of Net Sales 14.3 14.1 16.1 16.0 14.6 10.8 13.2 15.3 Depreciation 56,254 75,693 110,782 133,886 170,142 181,907 208,518 244,002 EBIT 180,751 189,996 263,248 287,252 232,225 119,667 216,574 366,905 Product Dev. Exp. 13,892 20,216 25,652 28,752 34,804 36,935 40,659 44,761 Interest 29,822 35,533 47,338 48,615 46,234 38,599 41,195 42,719 Other Income 6,618 8,115 8,286 8,987 9,817 7,589 7,224 6,553 EO Exp/(Inc) 1,774 876 2,777 930 18,794 -8,719 0 0 Forex Gain/ (Loss) 6,541 5,151 7,077 917 2,402 -1,106 0 0 PBT 135,339 136,335 188,690 217,026 139,809 61,547 141,943 285,978 Tax -400 37,710 47,648 76,429 28,726 27,673 38,572 67,495 Effective Rate (%) -0.3 27.7 25.3 35.2 20.5 45.0 27.2 23.6 Reported PAT 135,739 98,625 141,042 140,597 111,083 33,875 103,371 218,483 Change (%) 47.2 -27.3 43.0 -0.3 -21.0 -69.5 205.2 111.4 % of Net Sales 8.2 5.2 6.1 5.3 4.0 1.2 3.2 5.5 Minority Interest -823 -837 -595 -868 -1,059 -973 -1,087 -1,201 Sh. of profit of associate 249 1,138 -537 134 213 15,201 18,248 20,797 Net Profit 135,165 98,926 139,910 139,863 110,238 48,102 120,532 238,078 Adj. PAT 119,008 99,560 141,986 140,465 125,170 43,303 120,532 238,078 Change (%) 28.3 -16.3 42.6 -1.1 -10.9 -65.4 178.3 97.5 Balance Sheet (Consolidated) (INR Million) Y/E March 2012 2013 2014 2015 2016 2017E 2018E 2019E Share Capital 6,348 6,381 6,438 6,438 6,792 6,792 6,792 6,792 Reserves 320,638 369,992 649,597 556,181 801,035 842,205 951,712 1,178,766 Net Worth 326,985 376,373 656,035 562,619 807,827 848,996 958,504 1,185,558 Loans 471,490 557,223 549,545 692,115 630,999 617,916 599,832 581,748 Deferred Tax -23,743 -24,094 -7,748 -13,900 4,397 4,397 4,397 4,397 Capital Employed 777,803 913,206 1,202,038 1,245,167 1,452,105 1,481,165 1,573,675 1,783,846 Gross Fixed Assets 897,791 1,205,654 1,329,282 1,582,066 1,891,371 2,389,301 2,698,801 3,044,801 Less: Depreciation 495,125 570,818 688,154 744,241 875,469 1,057,375 1,265,893 1,509,895 Net Fixed Assets 402,667 634,836 641,128 837,825 1,015,902 1,331,925 1,432,907 1,534,906 Capital WIP 159,458 60,000 332,626 286,401 272,604 70,000 70,000 70,000 Goodwill 40,937 41,024 49,788 46,970 48,365 48,365 48,365 48,365 Investments 89,177 90,577 106,867 153,367 204,661 219,862 238,109 258,906 Curr.Assets 711,679 829,538 1,046,103 1,034,685 1,124,179 1,001,436 1,033,836 1,436,139 Inventory 182,160 209,690 272,709 292,723 333,990 314,886 369,583 459,495 Sundry Debtors 82,368 109,427 105,742 125,792 129,900 138,243 158,393 196,926 Cash & Bank Bal. 182,381 211,127 297,118 321,158 328,800 210,317 161,370 428,728 Loans & Advances 249,952 280,739 273,241 256,948 286,983 291,983 296,983 301,983 Current Liab. & Prov. 626,116 742,769 974,474 1,114,081 1,213,607 1,190,424 1,249,543 1,564,469 Sundry Creditors 366,863 447,801 573,157 574,073 636,329 637,453 703,968 875,228 Other Liabilities 130,835 134,250 199,707 328,305 372,083 337,927 299,186 382,912 Net Current Assets 85,564 86,769 71,629 -79,396 -89,428 -188,988 -215,707 -128,331 Appl. of Funds 777,803 913,206 1,202,038 1,245,167 1,452,105 1,481,165 1,573,675 1,783,846 E: MOSL Estimates

Tata Motors

2 March 2017 37

Financials and Valuations

Ratios (Consolidated)

Y/E March 2012 2013 2014 2015 2016 2017E 2018E 2019E Basic (INR)

EPS 37.5 31.2 44.1 43.6 36.9 12.8 35.5 70.1 EPS Fully Diluted 37.5 31.2 44.1 43.6 36.9 12.8 35.5 70.1 Normalized EPS ^ 21.2 11.4 17.8 14.1 5.6 -18.1 -0.3 29.3 EPS Growth (%) 28.9 -16.8 41.3 -1.1 -15.5 -65.4 178.3 97.5 Cash EPS 55.2 54.9 78.5 85.2 87.0 66.3 96.9 142.0 Book Value (Rs/Share) 103.0 118.0 203.8 174.8 237.9 250.0 282.3 349.1 DPS 4.0 2.0 2.0 0.0 0.2 3.0 4.0 4.0 Payout (Incl. Div. Tax) % 12.4 7.4 5.3 0.0 0.7 28.3 13.6 6.9 Valuation (x)

Consolidated P/E 10.3 12.2 35.2 12.7 6.4 Normalized P/E 31.9 79.7 -24.8 -1,577.5 15.3 EV/EBITDA 3.9 4.0 5.7 4.1 2.3 EV/Sales 0.6 0.6 0.6 0.5 0.4 Price to Book Value 2.6 1.9 1.8 1.6 1.3 Dividend Yield (%) 0.0 0.0 0.7 0.9 0.9 Profitability Ratios (%)

RoE 45.9 28.3 27.5 23.1 18.3 5.2 13.3 22.2 RoCE 29.1 17.0 19.2 15.7 14.3 4.8 10.7 17.0 RoIC 60.2 30.6 38.7 39.2 32.6 8.1 15.1 26.3 Turnover Ratios

Debtors (Days) 18 21 17 17 17 18 18 18 Inventory (Days) 40 41 43 41 44 41 42 42 Creditors (Days) 81 87 90 80 84 83 80 80 Asset Turnover (x) 2.1 2.1 1.9 2.1 1.9 1.9 2.0 2.2 Leverage Ratio

Debt/Equity (x) 1.4 1.5 0.8 1.2 0.8 0.7 0.6 0.5

Cash Flow Statement (Consolidated) Y/E March 2012 2013 2014 2015 2016 2017E 2018E 2019E OP/(Loss) before Tax 135,165 98,926 139,910 139,863 110,238 48,102 120,532 238,078 Int/Div. Received 5,376 8,062 6,933 7,777 9,817 7,589 7,224 6,553 Depreciation 56,209 75,648 110,736 133,864 131,228 181,907 208,518 244,002 Direct Taxes Paid -17,679 -22,231 -43,083 -41,940 -10,430 -27,673 -38,572 -67,495 (Inc)/Dec in WC -22,801 -680 57,744 -36,718 17,674 -18,922 -22,228 179,982 Other Items 24,401 64,617 88,983 136,570 3,154 973 1,087 1,201 CF from Op Activity 180,670 224,343 361,223 339,415 261,681 191,976 276,561 602,320 Extra-ordinary Items 8,549 4,342 7,221 20,191 -18,794 8,719 0 0 CF after EO Items 189,219 228,684 368,444 359,606 242,888 200,696 276,561 602,320 (Inc)/Dec in FA+CWIP -137,829 -187,203 -269,252 -315,396 -295,509 -295,325 -309,500 -346,000 (Pur)/Sale of Invest. -72,976 -54,984 -36,611 -37,570 -51,294 -15,201 -18,248 -20,797 CF from Inv Activity -210,804 -242,188 -305,863 -352,966 -346,803 -310,526 -327,748 -366,797 Issue of Shares 1,386 7 1 0 135,788 5,344 5,344 5,344 Inc/(Dec) in Debt 113,054 45,082 30,092 122,288 -61,115 -13,084 -18,084 -18,084 Interest Paid -33,737 -46,560 -61,706 -63,070 -46,234 -38,599 -41,195 -42,719 Dividends Paid -15,031 -15,087 -7,220 -7,204 -818 -12,276 -16,368 -16,368 CF from Fin Activity 65,672 -16,558 -38,832 52,014 27,621 -58,616 -70,303 -71,827 Inc/(Dec) in Cash 44,087 -30,061 23,749 58,655 -76,294 -168,446 -121,490 163,697 Add: Beginning Bal. 104,244 153,550 142,531 152,629 211,283 134,990 -33,456 -154,947 Closing Balance 148,330 123,488 166,280 211,283 134,990 -33,456 -154,947 8,750 E: MOSL Estimates

Tata Motors

2 March 2017 38

N O T E S

RECENT INITIATING COVERAGE REPORTS

REPORT GALLERY

http://ftp.motilaloswal.com/emailer/Research/SHKL-20161220-MOSL-IC-PG034.pdf

http://ftp.motilaloswal.com/emailer/Research/ENDU-20161216-MOSL-IC-PG032.pdf

http://ftp.motilaloswal.com/emailer/Research/LTI-20161214-MOSL-IC-PG036.pdf

http://ftp.motilaloswal.com/emailer/Research/RBL-20161110-MOSL-IC-PG042.pdf

http://ftp.motilaloswal.com/emailer/Research/CESC-20161110-MOSL-IC-PG046.pdf

http://ftp.motilaloswal.com/emailer/Research/UBBL-20161003-MOSL-IC-PG048.pdf

http://ftp.motilaloswal.com/emailer/Research/FORH-20161014-MOSL-IC-PG052.pdf

http://ftp.motilaloswal.com/emailer/Research/EQUITAS-20160728-MOSL-IC-PG046.pdf

http://ftp.motilaloswal.com/emailer/Research/PAG-20151116-MOSL-IC-PG038.pdf

Tata Motors

2 March 2017 40

Disclosures

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