Tata Motors - The Smart Investor

Tata MotorsCMP: INR267 TP: INR370 Buy

Valuation summary (INR b)Y/E March 2012 2013E 2014E

Net Sales 1,657 1,971 2,186

EBITDA 237 271 310

NP 126 110 137

EPS (INR) 37.8 33.2 41.3

EPS Gr. (%) 38 -12 24

BV/Sh. (INR) 103.0 133.8 169.8

P/E (x) 7.1 8.0 6.5

Norm. P/E (x) 12.0 19.1 13.7

P/BV (x) 2.6 2.0 1.6

EV/EBITDA (x) 4.4 3.7 3.1

EV/Sales (x) 0.6 0.5 0.4

RoE (%) 38.4 25.2 24.7

RoCE (%) 24.1 23.9 24.2

JLR momentum to sustain; 13.4% volume CAGR over FY12-15Strong FCF to drive de-leveraging despite significant investment program

JLR product action, market expansion to drive 13.4% CAGR (FY12-15)Luxury vehicle market volume momentum remains intact. Top 4 players grew

~9.3% in FY13YTD (Apr-Aug) led by 21% growth in China. Luxury SUV (JLR's strength)

growth remains robust across markets; FY13YTD, SUV volume growth is 40% for

JLR and 18% for Mercedes Benz. Expect JLR's volumes to grow ~15% in FY13 leading

the 13.4% CAGR over FY12-15E on the back of product expansion (40 product

actions over 5 years) and further market penetration. JLR's China volumes should

benefit from expected ~18% CAGR in the market over CY11-15, JLR's own dealer

expansion and Chery JV enabling JLR to compete better with a production base

in China.

M&HCV segment could witness strong revival in FY14Likely bottoming out of IIP growth (1.4% in FY13, lowest since FY92), expected

interest rate downcycle, and favorable macro impetus (e.g. FDI in retail) should

augur well for M&HCV business. We expect Tata Motors' (TTMT) M&HCV volume

to grow 10% in FY14, recovering from likely 12% de-growth in FY13. LCV volume

momentum remains strong with ~20% growth in FY13YTD. Expect 15% CAGR in

LCV volumes over 2 years, driven by SCVs.

Consolidated EBITDA margin to improve in FY14, strong FCF despiteaggressive capexWe expect Consolidated EBITDA margin to recover 50bp in FY14 to 14.2%. JLR's

EBITDA margin should improve 60bp to 15% in FY14 on the back of better mix and

operating leverage. We believe TTMT has multiple levers to support/improve

margins over next 3-4 years. Our estimates for FY15 are yet to factor in any benefits

from the Chery JV and own engine plant in UK & India. Our estimates suggest

consolidated FCF generation of INR274b over FY13-15, despite investing ~INR600b,

transforming it into a net cash company by FY15.

8% upgrade in FY14 EPS; Buy with TP of INR370/223 (ordinary/DVR)We believe JLR is on the right strategic path and is investing in the right areas,

resulting in its evolution to a much stronger and balanced player in the luxury

vehicle market. The CV business, which contributes ~35% to fair value, is expected

to witness recovery in FY14, resulting in significant improvement in standalone

operations. We are upgrading our FY14 consolidated EPS by 8.1% to INR41.1 to

factor in for improvement in JLR's product mix. The ordinary/DVR stock is currently

trading at 8x/4.8x FY13E and 6.5x/3.9x FY14E consolidated EPS. Maintain Buy with

revised target price of INR370 (FY14 SOTP based) for ordinary share and INR223

for DVR (40% discount to ordinary).

Bloomberg TTMT IN

Actual Eq. Shares (m) 3,173.8

Diluted Eq.Shares (m) 3,323.8

52-Week Range (INR 321/145

1,6,12 Rel. Perf. (%) 7/-11/57

M.Cap. (INR b) 889.0

M.Cap. (USD b) 16.9

1 October 2012

Update | Sector: Automobiles

BSE SENSEX S&P CNX

18,763 5,703

Jinesh Gandhi ([email protected]); + 91 22 3982 5416

Chirag Jain ([email protected]); + 91 22 3982 5418

Shareholding pattern %As on Jun-12 Mar-12 Jun-11

Promoter 34.8 34.9 34.9

Dom. Inst 12.0 12.7 13.7

Foreign 44.9 44.5 43.1

Others 8.4 7.9 8.3

Investors are advised to refer

through disclosures made at the end

of the Research Report.

Stock performance (1 year)

Tata Motors

1 October 2012 2

Story in charts Volume momentum to sustain; Strong FCF to drive de-leveraging

Driven by new product actions & further market

penetration, JLR volumes estimated to grow at

13.4% CAGR over FY12-15E.

In worst case scenario of ~10% volume de-growth

in FY14 JLR volumes, TTMT's SOTP is INR286.

With bottoming out of IIP in FY13 at 1.4%, lowest

since FY92, favorable macro impetus and expected

interest rate downcycle should augur well for

M&HCV business.

FY14 EBITDA margins to benefit from mix

improvement and operating leverage. Our FY15

estimates yet to factor in for any benefit of Chery

JV and own engine plant.

Consolidated FCF generation of INR274b over

FY13-15, despite investing ~INR600b,

transforming it into a net cash company by FY15.

JLR volumes est. to grow at 13.4% CAGR over FY12-15E JLR: FY14 Volumes Sensitivity Analysis

M&HCV volumes are sensitive to interest rate movements Consolidated EBITDA margins to improve in FY14

TTMT to generate ~INR274b of FCF, despite investing ~INR600b over FY13-15, transforming it into a net cash company by FY15

Scenario Base Case A C E

Volumes (units) 396,087 326,304 362,560 416,944

Monthly run-rate (units) 33,007 27,192 30,213 34,745

Growth (%) 9.2 -10.0 0.0 15.0

EBITDA (GBP m) 2,619 1,791 2,221 2,866

EBITDA Margins (%) 15.0 12.4 13.9 15.6

PAT (GBP m) 1,358 771 1,076 1,534

Growth (%) -8.3 -48.0 -27.4 3.6

TTMT Consol EPS (INR) 41.3 23.2 31.0 42.8

TTMT SOTP TP (INR/Share) 371 286 330 397

Upside (%) 42.9 10.2 27.2 52.7

'000 Units

(INR b) (INR b)

Tata Motors

1 October 2012 3

JLR: Product actions to drive volume CAGR of 13.4% (FY12-15)China volume momentum intact; to get boost by dealership expansion

Luxury vehicle market volume momentum remains intact. Top 4 players grew ~9.3% in

FY13YTD led by 21% growth in China.

Luxury SUV growth remains robust across markets; FY13YTD, SUV volume growth is 40%

for JLR and 18% for Mercedes Benz.

Expect JLR's volumes to grow ~15% in FY13 leading the 13.4% CAGR over FY12-15E on the

back of product and market expansion.

JLR's China volumes should benefit from expected ~18% CAGR in the market over CY11-15

as well as JLR's own dealer expansion.

Luxury vehicle momentum intact, with strong growth for luxury SUVsMomentum in the global luxury vehicles market remains intact despite challenging

macro environment. Volumes of top 4 players (Audi, BMW, JLR and Mercedes Benz

(MB)] are up 10% in Aug-12 and 9% FY13YTD (Apr-Aug 2012). Volumes across key

markets are holding up well, with China continuing to grow strongly, and US/UK markets

steadily. In China, wholesale volumes of top 3 (Audi, BMW, MB) grew 21% in FY13YTD.

In US/UK, retail volumes for top 4 (Top 3 + JLR) grew 10%/5%.

Further, luxury SUV volume growth remains robust across markets and players, and

has been one of the key contributors to overall volume growth. Most players do not

disclose SUV volumes separately; however, their commentary on volumes distinctly

highlights strong growth in this category e.g. FY13YTD, SUV volumes grew 40% for JLR

and 18% for MB.

Volume momentum for top-4 remains intact China momentum remains strong *

* Aggregate wholesale volumes of Audi, BMW and Mercedes Benz Source: BMW, Company, MOSL

Volume momentum remains intact, with ~9% FY13YTD growth for top-4 players. In China, wholesale volumes of top 3

(Audi, BMW, MB) grew 21% in FY13YTD. In US/UK, retail volumes for top 4 (Top 3 + JLR) grew 10%/5%.

Tata Motors

1 October 2012 4

Retail volume growth holding up well in both US and UK ̂

^ Aggregate retail volumes of Audi, BMW, JLR and Mercedes Benz Source: BMW,Company, MOSL

Expect JLR to deliver 15.3% growth in FY13 and 13.4% CAGR over FY12-15We expect JLR to deliver 15.3% volume growth in FY13 on the back of (1) momentum

in luxury vehicle market, coupled with (2) strength in Evoque volumes, and (3) other

new product actions. We expect FY13 Evoque volumes at 100-110,000, and non-Evoque

portfolio to grow 5-7% (v/s 9% de-growth in FY13YTD). Recovery in non-Evoque

volumes would be driven by several product actions in 2HFY13: (a) new Range Rover

launch, (b) AWD Jaguar in USA, (c) MY13 Freelander 2, and (d) expansion of dealer

network in China by 35 to ~145 dealers by Mar-13. Also, recent capacity addition in

Halewood plant (25,000 units) will ease capacity constraints on Freelander.

We believe JLR's 2HFY13 launches coupled with its future product pipeline will

diversify and enhance its offerings, thus strengthening its business. It plans to

complete 40 new product actions over next 5 years, which includes (1) a new platform

every 7 years, (2) major refreshes every 4 years for each model, and (3) minor refreshes

every 2 years. FY14 will see full benefit of new Range Rover (retail launch in Jan-13),

XF Sportbrake and launch of new Range Rover Sport , whereas FY15 could see launch

of smaller Jaguar, new Defender and a Jaguar Crossover. Of these new launches, smaller

Jaguar would be a very important product as it will be positioned in the high-volume

executive luxury car segment. This is 1.25m cars per annum market dominated by

BMW 3 series, Mercedes C Class, etc, and where JLR has no presence currently. As a

result, we expect JLR to deliver ~13.4% volume CAGR over FY12-15.

Tata Motors

1 October 2012 5

Source: Autocar

Expect JLR volume to improve from Oct-12, despite high base (units)

Jaguar's - New product pipeline

Launch Model Comments/ features Segment volumes

schedule m units

2012 (late) XF Sportbrake 1st estate from Jaguar; BMW & Audi gets cum. 0.1

(estate) ~0.1m vols from this segment

2013 (mid) XE sports car All-new Boxter competitor

2013 (mid) XJ Facelift 0.25

2013 (late) New XK Launches new styling theme 0.25

2013 (Mid) F-Type Sportscar

2013 C-X75 Sportscar

2014 (mid) Compact saloon Marks entry into Executive segment having volumes of over 1.1m p.a 1.25

2014 (late) Crossover Marks entry into Crossover segment; Platform variant of Saloon/ SUV E segment

2015 (mid) New XF Alloy Chasis-5-series rival 1

Source: Autocar

Land Rover's - New product pipeline

Sep-11 Evoque Smallest Range Rover

2012 New Range Rover Ligher than current model, based on PLA platform 0.6

2012 MY13 Freelander 2 Revamped interiors and minor tweaks on exterior 0.4

2013 New RR Sport New ZF eight-speed gearbox and based on PLA platform 0.6

2014 New Defender Defender replacement, focusing on segment having ~0.2m p.a volumes 0.3

2014 Grand Evoque Based on Evoque's platform and to be positioned in SUV D segment, 0.3

where JLR has weak presence

2016 New Freelander

2016 New Discovery

Source: Autocar

Source: Autocar

~40 product actions to drive 13.4% CAGR in volumes over FY12-15E ('000 units)

Tata Motors

1 October 2012 6

China volumes driven by strong demand, dealer expansion and Cherry JVChina is already one of the biggest markets for luxury cars and is expected to become

number one in next 1-2 years, driven by strong demand on the back of rising income

levels and urbanization. The Chinese luxury car market is expected to grow @ 18%

over CY11-15 and 11% over CY11-20 (source: Global Insights).

China is one of the most important and profitable markets for JLR. Like most luxury

carmakers, JLR too is taking several initiatives to improve its competitiveness in the

Chinese market. These include:

(1) Increasing dealer network from ~110 dealers to 145 by March 2013, with focus on

tier-2/3 cities.

(2) Modifying products to suit local taste with changes like long wheelbase, smaller

petrol engines, etc.

(3) Setting up manufacturing operations in China through a JV with local company

Chery Auto (government approvals are awaited).

China luxury vehicle market estimated to growth at11% CAGR over CY11-20 Dealer network in China (Nos)

CAGR 2011-2020

11.3%

Strong volume growth coupled with higher realizations is driving increasing contribution from China

*FY12/FY13 Source: BMW, Company, MOSL

JLR's volume in China to benefit from strong underlying growth & dealer expansion

Chinese market is one of the most important and profitable market for JLRGBP

Tata Motors

1 October 2012 7

JV with Chery Auto to improve JLR's competitiveness in China JLR has entered into an equal JV with Chery Auto of China to develop,

manufacture and sell in China certain JLR vehicles, and at least one own-branded

model. The term of the JV is 30 years.

JLR would be investing ~GBP350m as its equity contribution in this JV. The total

investment by the JV is reported to be GBP2.3b.

Chery, founded in 1997, is China's largest independent carmaker with CY11

volume of ~0.64m. It does not have a presence in the luxury car segment.

The JV will leverage the strength of both partners, and enable JLR to compete

better with a production base in China (its global peers already have

manufacturing presence here). China imposes import duties of ~80% on CBUs

and ~30% on CKDs.

Tata Motors

1 October 2012 8

M&HCV segment could revive strongly in FY14 on better macroLCV volume momentum to remain strong

Likely bottoming out of IIP growth (1.4% in FY13, lowest since FY92), expected interest

rate downcycle, and favorable macro impetus (e.g. FDI in retail) should augur well for

M&HCV business.

We expect TTMT's M&HCV volume to grow 10% in FY14, recovering from likely 12% de-

growth in FY13.

LCV volume momentum remains strong with ~20% growth in FY13YTD. Expect 15% CAGR

in LCV volumes over two years, driven by SCVs.

Rising contribution of LCVs (~69% of CV volumes v/s 58% in FY09) has reduced volatility in

CV business for TTMT.

M&HCV: Near-term pressure given slowing economyThe domestic M&HCV market is facing volume pressure (down 12% YoY FY13YTD),

reflecting the slowdown in industrial and economic activity. Our channel interaction

indicates that fleet operators have been reluctant to expand their fleet size given the

currently weak economy. Moreover, discount levels have increased substantially over

the last few months as recent entrants attempt to gain market share in a slowing

market.

Unlike the 2008 financial crisis, there has been no major constraint on financing

environment with Net NPA levels of NBFCs being less than 1%, although there are

increasing instances of delayed payments by fleet operators. Also, post recent

production cuts, channel inventory is currently at comfortable levels.

M&HCVs - Goods Domestic (units)

Aug-12 volumes

positively surprised us,

as we expecting higher

de-growth

Source: Company, MOSL

M&HCV volumes could recover strongly in FY14Recent reform initiatives of the India government have improved sentiment

somewhat, and could help revive the economy in FY14. Key macro-economic variables

influencing the M&HCV market, viz, interest rates, industrial activity and infrastructure

development, are expected to improve, which augur well for demand. We believe

M&HCV growth could surprise on the upside as pent-up demand (deferred FY13

replacement demand) gets realized.

Tata Motors

1 October 2012 9

M&HCV volumes are highly sensitive to Industrial activity and interest rate movements

*data prior to FY02 relates to CY; ^ positive interest rate movement indicates rate cuts Source: SIAM

M&HCV cycles are generally sharp & severe. Hence there is

high upside risk to our FY14 volume growth estimates

Our economist believes IIP growth has bottomed out at 1.4%

for FY13, the lowest since 1992. Industrial activity will benefit

from favorable macro impetus, expected interest rate

downcycle, and a low base. These factors will likely result in

an upturn of industrial growth to 5.6% in FY14.

LCVs continue to grow at healthy rates, lowering cyclicality Small CVs to drive 15% growth in LCVs: Domestic LCV market momentum remains

robust with FY13YTD volume growth at 20% and TTMT at 17%. Led by relatively

stable consumption expenditure and need for last mile connectivity (especially

in rural markets), LCVs continue to register healthy growth driven by small CVs

(e.g. Ace).

Rising share of LCVs CV-mix improving margins, lowering cyclicality: With the

launch of Tata ACE in 2005, small CV sales clocked a robust 24% CAGR over FY05-12.

LCV now contributes ~69% of CV volumes (v/s 58% in FY09), resulting in relatively

lower volatility in CV volumes. As small CVs are relatively less cyclical and more

profitable, higher LCV share is improving TTMT's CV business profile (LCV is TTMT's

most profitable domestic segment).

Strong growth in LCVs driven by Small CVs Tata Motors: LCVs contribution on continuous uptrend

Source: SIAM

Increasing contribution of LCVs (~69% of CV volumes (v/s 58%

in FY09) have reduced volatility in CV business for Tata Motors.

Tata Motor's domestic LCV volume growth of ~17% (including

passenger variants of SCVs).

Tata Motors

1 October 2012 10

Improvement in both JLR and CV business to drive up EBITDAmargin in FY14Generating FCF despite aggressive capex; balance sheet further deleveraged

We expect consolidated EBITDA margin to expand by 50bp in FY14 to 14.2%.

JLR's EBITDA margin should expand 60bp to 15% in FY14, driven by mix improvement and

operating leverage. There are multiple levers to support/enhance margins over the next

3-4 years.

Standalone business is likely to witness ~80bp margin expansion to 8.8%, driven by recovery

in M&HCV volumes and continuance of strong LCV volumes.

Consolidated FCF generation of INR274b over FY13-15, despite TTMT investing ~INR600b,

would transform it into a net cash company by FY15. Our estimates do not fully factor in

the benefits of the investment program.

JLR margins - limited downside from current level; multiple levers to drivemarginsWe expect JLR's profitability to remain under pressure over the next six months due

to higher discounts for running out the old Range Rover and seasonally weaker 2Q.

However, EBITDA margin should expand from 4QFY13, driven by market mix tilting in

favor of China (24.5% volume contribution by FY14 v/s 17.3% in FY12), product mix

shifting in favor of the new Range Rover (~12% premium to the old one) and favorable

forex. In the long term, commissioning of the Chery JV in China (by FY15) and own

engine plant (for 4-cylinder engines) in UK and India (FY15/FY16) would also improve

JLR's cost competitiveness and EBITDA margin. We discuss below the key drivers in

detail.

EBITDA margin to improve in FY14


Mix improvement (product and market): With strong growth expected in China

due to market expansion, dealer expansion and launch of localized products,

contribution of China to FY14 volumes and revenues is likely to increase to 24.5%

and 41%, respectively (from 17% and 29%, respectively in FY12). The market mix

improvement will be supplemented by improvement in product mix, driven by

launch of premium products like the new Range Rover (4QFY13), new Range Rover

Sport (mid-FY14) and F-Type Sport car (mid-CY13). Our estimates partly factor in

improvement in product mix, but are yet to factor in improvement in market mix.

We expect EBITDA margin

for FY14 to be favourably

impacted by mix

improvement and

operating leverage. Our

estimates for FY15 are yet

to factor in any benefits

from the Chery JV and

own engine plant.

Tata Motors

1 October 2012 11

Mix improvement to be driven by strong growth in China and launch of premium products (%)


Range Rover: List price for entry trim level (UK)

GBP New Old Premium (%)

3 Ltr V6 Diesel 58,983 - NA

4.4Ltr SDV8 Diesel 64,354 57,494 11.9

5 Ltr V8 Petrol 81,092 71,368 13.6


Favorable forex movement: Favorable movement in the USD (net exporter) and

EUR (net importer) against the GBP would support EBITDA margin. We estimate

~30bp QoQ margin improvement in 2QFY13 based on the prevailing GBP/USD and

EUR/GBP rates.

Operating leverage: We estimate ~13.7% volume CAGR over FY12-15. However,

our estimates do not fully factor in the resultant operating leverage. In fact, our

estimates factor in ~40bp increase in fixed costs over FY12-14. Operating leverage

in the luxury car business is very high and lower volumes is a key reason behind

the lower profitability for JLR vis-à-vis its peers.

Trend in volumes and fixed cost (as % of sales)

New Range Rover at

~12% premium to

outgoing model


Our estimates do not

fully factor in the benefit

of operating leverage

Tata Motors

1 October 2012 12

Chery JV to improve JLR's competitiveness and profitability: Upon commissioning

of the Chery JV in China, JLR would be on equal footing in the Chinese market

with its peers, who already have local manufacturing bases in China and do not

have to pay very high import duties. On comparing the prices of luxury vehicles in

China, we note that (a) vehicles are priced at premium (v/s UK pricing) even after

adjusting for import duty, and (b) locally manufactured as well as imported vehicles

are similarly priced. We believe that JLR would also be able to retain some pricing

premium upon having local manufacturing facilities.

Pricing premium in China (v/s UK pricing) also due to high import duty

Similar pricing for model which is imported as well as locally made (CNY '000)

Source: BMW, Company, MOSL

Captive source for engines from FY15: JLR has announced plans to invest GBP355m

in an engine plant at Wolverhampton, UK. The new plant will design, engineer

and manufacture engines with lower emissions than current models for a new

range of four-cylinder gasoline and diesel vehicles. However, it would continue

to source V6s and V8s, both diesel and petrol, from Ford. Having captive source of

engines will help JLR compete with its peers, especially in the growth markets of

China and Russia. Apart from the engine plant in UK, it is also planning to set up a

similar engine plant in India, with an investment of ~GBP400m. According to media

articles, these engines will be modular in design and up to 2.0 liters in capacity.

When both the plants are operational by FY15, engine capacity could reach 500,000

units per year, which would be sufficient to cater to its expanded operations

(including Chinese JV).

Luxury vehicles enjoy

premium pricing in China

as compared to other

markets, even after

adjusting for import

duties

Tata Motors

1 October 2012 13

Incentives at higher levels, impacted by model change and moderation indemandThe level of incentives offered by luxury car makers has increased over the last few

months in key markets. However, the biggest driver of higher incentives is the ongoing

model change for several key models across key markets, necessitating higher

discounts for run-out old models. Also, increased supply and some moderation in

demand growth have resulted in withdrawal of premium charged by dealers, especially

in markets like China. This has resulted in normalization of dealer margins. Earlier,

dealers used to earn super-normal margins due to very high waiting periods on key

models in China. While current incentive levels for JLR are normal, if demand weakens

further, it would have to increase incentives to support demand. Further, as the

contribution of new products (Evoque, New Range Rover and New Range Rover Sport)

increases, it would restrict the impact of any increase in incentives, as new products

generally tend to have no discounts.

Multiple model changes necessitating higher incentives to run-out old model

Month Model Changes

May-12 BMW 6 Series Gran Coupé in June 2012

Jun-12 Mercedes: New GLK

Audi: New generations of the A4 & A5 in US

Jul-12 BMW: New 7 Series & X1

Audi Q3 in China

Aug-12 New BMW 3 Series with xDrive

Mercedes: End-August new B Class in China;

New A Class in Sep-12

Audi A3 & updated Q5


Higher contribution of new products to restrict impact of anyincrease in incentives (%)


Domestic margins to remain stable - benign RM cost, better product mix(LCVs) negated by higher discounts on M&HCV/PVsThe management has indicated that RM cost has been stable, with commodity prices

softening. This coupled with favorable mix (higher LCV volumes) would offset the

impact of lower volumes and higher discounts in the M&HCV/PV business. We estimate

stable EBITDA margin in FY13 at 8% (10bp lower than FY12) - the ~100bp decline in RM

cost would be offset by higher discounts and lower operating leverage. Current EBITDA

margin is near the historical low of 6.7% in FY09 as against the 10-year average of

~10.4%. While we expect volume recovery in M&HCVs from FY14, we estimate just

~70bp margin expansion in FY13, driven by operating leverage and softening in RM

cost, but benefit of which would be diluted by higher competitive intensity in the

domestic M&HCV industry.

Tata Motors

1 October 2012 14

RM cost to moderate, reflecting soft commodity prices andImproving product mix (in favor of LCVs, %) better product mix


Lower volumes resulting in negative operating leverage in FY13 EBITDA margin to remain well below LPA of 10.4%


Strong FCF generation despite higher capex to drive continued balance sheetdeleveragingTTMT would be investing ~INR600b over FY13-15 in R&D and capacity creation in both

JLR and domestic business. JLR would be investing ~GBP2b/year over the next three

years in product development, engine plants in UK and India, and the Chery JV.

Domestic business has plans to invest ~INR30b/year in product development, new

capacities and marketing infrastructure.

Despite its significant investment program, the benefit of which will be realized only

in the future, TTMT is likely to generate FCF of ~INR274b over FY13-15, driven strong

cash flow from operations (CFO) of ~INR870b. We estimate JLR's FCF generation at

~GBP680m, based on CFO of ~GBP7.25b, whereas the domestic business would

generate FCF/ CFO of ~INR81b/171b.

Tata Motors

1 October 2012 15


TTMT to generate ~INR274b of FCF, despite investing~INR600b over FY13-15… (INR b) …transforming it into a net cash company by FY15 (INR b)

Tata Motors

1 October 2012 16

Sustained growth to drive deleveraging; upgrading FY14 EPS 8%Target price of INR370 implies 39% upside; Buy

While we maintain our consolidated EPS estimate for FY13 at INR33.5, we are upgrading

our FY14 consolidated EPS estimate by 8.1% to INR41.1 to factor in improvement in JLR's

product mix.

We believe JLR is on the right strategic path and is investing in the right areas, resulting in

its evolution to a much stronger and balanced player in the luxury vehicle market.

The CV business, which contributes ~35% to fair value, is expected to witness recovery in

FY14, resulting in significant improvement in standalone operations.

Maintain Buy with a revised target price of INR370 (FY14E SOTP-based) for ordinary shares

and INR223 for DVR (~40% discount to the TP for ordinary shares).

Upgrading EPS estimate for FY14 by 8%While we maintain our consolidated EPS estimate for FY13 at INR33.5, we are upgrading

our consolidated EPS estimate for FY14 by 8.1% to INR41.1 and normalized EPS

estimate by 13.9% to INR19.5 to factor in improvement in JLR's product mix, though

we are yet to factor in the benefit of operating leverage. Our key assumptions are:

JLR volume growth of 15.3%/9.2% in FY13/FY14 to 362,560/396,087units. Driven by

product mix improvement, we expect EBITDA margin to recover to 15% in FY14

(from 14.4% in FY13), resulting in 16% EBITDA growth in FY14 (12% in FY13).

However, increase in depreciation (due to new launches) would result in 22% PAT

de-growth in FY13 and 17% PAT growth in FY14.

Domestic volumes are likely to grow just 1.5%/14.5% in FY13/FY14, with growth of

-12%/7.5% for M&HCVs, 15%/15% for LCVs and -4%/18% for PVs. We expect EBITDA

margin to remain stable at 8% in FY13, but improve 70bp to 8.7% in FY14, driven by

operating leverage.

Revised forecast (INR b)

FY13E FY14E

Rev Old Chg (%) Rev Old Chg (%)

Consolidated - Key Assumptions

Net Sales 1,971 1,956 0.8 2,180 2,137 2.0

EBITDA 271 268 0.9 309 293 5.2

EBITDA Margins (%) 13.7 13.7 0bp 14.2 13.7 40bp

Net Profit 111 111 -0.2 137 127 7.6

Cons EPS 33.5 33.5 -0.2 41.1 38.3 7.5

Normal. EPS 14.2 14.7 -3.2 19.3 17.2 12.6

JLR - Key Assumptions (IFRS)

Volumes ('000 units) 363 365 -0.7 396 399 -0.7

Normal. EBITDA 120 116 3.3 138 123 11.9

EBITDA Margins (%) 14.4 14.3 10bp 15.0 14.3 60bp

Net Profit 101 99 2.5 116 102 13.3

Standalone - Key Assumptions

Volumes ('000 units) 937 970 -3.4 1,072 1,072 0.0

EBITDA 43 46 -7.4 53 56 -5.1

EBITDA Margins (%) 8.0 8.1 -10bp 8.7 8.7 0bp

Net Profit 24 17 44.2 21 24 -10.8

Source: MOSL

Our JLR estimates are to

factor in for any benefit

from own engine plant

and Chery JV

Tata Motors

1 October 2012 17

Buy with a target price of ~INR370, an upside of 39% We believe JLR is on the right strategic path and is investing in the right areas,

resulting in its evolution to a much stronger and balanced player in the luxury

vehicle market.

JLR's volume momentum is likely to remain strong, driven by product actions,

though there are potential macro headwinds that can impact volumes in the EU

(~23% of volumes). Strength in volumes coupled with mix improvement would

drive EBITDA margin.

The CV business, which contributes ~35% to fair value, is expected to witness

recovery in FY14, resulting in significant improvement in standalone operations.

The stock is currently trading at 8x FY13E and 6.5x FY14E consolidated EPS. The

DVR stock trades at 4.8x FY13E and 3.9x FY14E consolidated EPS.

Maintain Buy, with a revised target price of INR370 (FY14E SOTP-based) for ordinary

shares and INR223 for DVR (~40% discount to the TP for ordinary shares).

Tata Motors: Sum-of-the-parts valuation (INR b)

Valuation Parameter Multiple (x) FY13E FY14E FY15E

SOTP Value

Tata Motors - Standalone EV/EBITDA 8 342 433 490

JLR (Adj for R&D capitalization) EV/EBITDA 4 588 673 736

HV Axles EV/EBITDA 4 9 10 12

HV Transmission EV/EBITDA 4 8 9 11

Tata Technologies EV/EBITDA 4 10 12 13

Tata Daewoo EV/EBITDA 4 10 13 14

Total EV 968 1,150 1,275

Less: Net Debt (Ex FCCB & TMFL) 52 12 (29)

Add: Other Investments

Tata Motors Finance P/BV 1 25 27 30

Other Associates/JVs Carrying Cost 9 10 11

Tata Sons 20% discount to mkt value 59 59 59

Total Equity Value 1,008 1,234 1,403

Fair Value (INR/Sh) - Ord Sh Fully Diluted 303 371 422

Upside (%) 13.4 38.8 57.8

Fair Value (INR/Sh) - DVR @ 40% discount 182 223 253

Upside (%) 13.2 38.6 57.6

Source: MOSL

Valuing TTMT's dometic business at 10% premium to Ashok Leyland's average EV/EBITDA

Source: MOSL

We value JLR business at

~15% discount to BMW's

EV/EBITDA, whereas

domestic business is

valued at 10% premium

to Ashok Leyland's LPA

EV/EBITDA

Ashok Leyland's long

period average

EV/EBITDA is 7.3x

Tata Motors

1 October 2012 18

JLR: FY14 Volumes Sensitivity Analysis

Scenario Base Case A B C D E

Volumes (units) 396,087 326,304 344,432 362,560 380,688 416,944

Monthly run-rate (units) 33,007 27,192 28,703 30,213 31,724 34,745

Growth (%) 9.2 -10.0 -5.0 0.0 5.0 15.0

JLR (GBP m)

Sales 17,492 14,410 15,210 16,011 16,811 18,413

EBITDA 2,619 1,791 2,006 2,221 2,436 2,866

EBITDA Margins (%) 15.0 12.4 13.2 13.9 14.5 15.6

EBITDA (adj for R&D cap) 1,969 1,142 1,357 1,572 1,787 2,217

Adj EBITDA Margins (%) 11.3 7.9 8.9 9.8 10.6 12.0

PBT 1,913 1,085 1,300 1,515 1,730 2,160

PAT 1,358 771 923 1,076 1,229 1,534

Growth (%) -8.3 -48.0 -37.7 -27.4 -17.0 3.6

Normalized PAT 531 -56 96 249 402 707

Growth (%) -46.9 -105.6 -90.4 -75.1 -59.8 -29.3

CFO 2,354 1,526 1,741 1,956 2,171 2,601

FCF 104 -724 -509 -294 -79 351

TTMT Net Auto Debt (INR b) 45.1 125.0 106.7 88.3 69.9 33.2

TTMT Consol EPS (INR) 41.3 23.2 27.1 31.0 35.0 42.8

TTMT Normal Consol EPS (INR) 19.5 1.6 5.5 9.5 13.4 21.2

TTMT SOTP TP (INR/Share) 370 284 307 329 351 395

Upside (%) 38.8 7.0 15.2 23.5 31.8 48.3


Benchmarking JLR's valuations to BMW's implied valuations for non-NBFCbusinessFor valuing JLR, we benchmark JLR to BMW's implied core business (ex NBFC). To

determine BMW's implied valuations for the core business, we strip-off the value

of the NBFC business (@1x P/BV) from market cap, and add net debt (ex NBFC) to

determine the implied EV. Similarly, for EBITDA, we add back depreciation of the

core business (ex NBFC) to core EBIT (ex NBFC). We get implied EV/EBITDA for BMW's

core business (ex NBFC) at 4.8x CY12E and 4.6x CY13E. We value JLR at an EV of 4x

FY14E EBITDA (~15% discount to BMW), at which the implied FY14E EV/Sales is 0.45x.

BMW: Valuing core business (excl NBFC)

EUR m CY10 * CY11 * CY12E CY13E

Total Market Cap 29,812 38,076 39,464 39,464

Less: NBFC @ 1x P/BV 5,216 7,169 8,574 9,969

MCap for non-NBFC business 24,596 30,907 30,890 29,495

Add: Net Debt (Non-NBFC) 28,634 22,555 22,555 22,555

EV for Non-NBFC business 53,230 53,462 53,445 52,050

EBITDA (excl NBFC) 7,502 9,823 11,066 11,415

Implied EV/EBITDA (for core business) 7.1 5.4 4.8 4.6

* based on average stock price during the year Source: BMW, Company, MOSL

In worst case scenario of

~10% volume de-growth

in FY14 JLR volumes,

TTMT's SOTP is INR286

BMW's implied valuation

for core business

(excluding NBFC

business) is ~4.6x CY13

Tata Motors

1 October 2012 19

JLR: Financials

Income Statement (GBP Million)Y/E March 2010 2011 2012 2013E 2014E

Total Income 6,527 9,871 13,512 15,697 17,492

Change (%) 31.1 51.2 36.9 16.2 11.4

Expenditure 6,635 8,900 12,236 14,323 15,877

EBITDA -108 971 1,276 1,374 1,615

% of Net Sales -1.7 9.8 9.4 8.8 9.2

Normalized EBITDA -429 516 646 639 788

% of Net Sales -6.6% 5.2% 4.8% 4.1% 4.5%

Depreciation 317 397 465 576 661

EBIT -425 574 811 798 954

Interest 50 23 69 54 45

PBT -475 551 742 743 909

Tax 28 79 26.0 474.3 555

Reported PAT -503 472 716 269 354

Net Profit -503 472 716 269 354

Normalized PAT * -824 17 86 -466 -473

E: MOSL Estimates; * Normalized for capitalized R&D expenses

Balance Sheet (GBP Million)Y/E March 2010 2011 2012 2013E 2014E

Share Capital 645 1,501 1,501 1,501 1,501

Reserves -1,107 -25 1,424 2,585 3,943

Net Worth -463 1,475 2,924 4,085 5,444

Loans 3,030 1,382 1,974 1,677 1,379

Deferred Tax -44 -111 -473 -473 -473

Capital Employed 2,524 2,746 4,425 5,289 6,350

Application of Funds

Gross Fixed Assets 3,345 4,096 5,505 6,984 9,057

Net Fixed Assets 2,884 3,292 4,251 5,153 6,565

Capital WIP 29 83 136 500 500

Investments 94 130 291 291 291

Curr.Assets 2,570 3,044 5,046 5,024 5,116

Inventory 995 1,156 1,497 1,720 1,917

Sundry Debtors 669 567 662 774 863

Cash & Bank Balances 680 1,028 2,430 2,014 1,762

Others 226 293 457 516 575

Current Liab. & Prov. 2,576 3,224 4,236 4,821 5,264

Sundry Creditors 1,931 2,385 3,285 3,870 4,313

Provisions 644 839 951 951 951

Net Current Assets -5 -180 811 203 -148

Appl. of Funds 3,001 3,326 5,489 6,147 7,208

E: MOSL Estimates

Tata Motors

1 October 2012 20

Tata Motors: Financials and Valuation

Income Statement (Consolidated) (INR Million)Y/E March 2010 2011 2012 2013E 2014E

Total Income 925,193 1,221,279 1,656,545 1,971,042 2,180,419

Change (%) 30.5 32.0 35.6 19.0 10.6

Expenditure 839,051 1,043,129 1,419,540 1,700,346 1,871,798

EBITDA 86,142 178,150 237,005 270,696 308,621

% of Net Sales 9.3 14.6 14.3 13.7 14.2

Depreciation 38,871 46,555 56,254 71,528 79,841

EBIT 47,270 131,595 180,751 199,168 228,780

Product Dev. Exp. 4,982 9,976 13,892 15,315 16,871

Interest 22,397 23,853 29,822 30,132 26,530

Other Income 416 4,295 6,618 6,836 7,011

EO Exp/(Inc) -14,075 0 1,774 4,405 0

Forex Gain/ (Loss) -845 -2,310 6,541 0 0

PBT 35,226 104,372 135,339 156,152 192,390

Tax 10,058 12,164 -400 48,010 55,781

Effective Rate (%) 28.6 11.7 -0.3 30.7 29.0

Reported PAT 25,169 92,208 135,739 108,142 136,609

Minority Interest -303 -485 -823 -671 -767

Share of profit of associate 845 1,014 249 700 852

Net Profit 25,711 92,736 135,165 108,171 136,693

Adj. PAT 15,051 90,695 125,568 111,222 136,693

Change (%) -171.2 502.6 38.5 -11.4 22.9

*Normalized for capitalized expenses

Balance Sheet (Consolidated) (INR Million)Y/E March 2010 2011 2012 2013E 2014E

Share Capital 5,706 6,377 6,348 6,559 6,559

Reserves 76,359 185,338 320,638 411,542 529,051

Net Worth 82,065 191,715 326,985 418,101 535,610

Loans 351,924 303,622 387,041 362,878 354,563

Deferred Tax 11,536 14,638 -23,743 -23,743 -23,743

Capital Employed 447,660 512,440 693,354 760,979 870,940

Gross Fixed Assets 648,518 715,231 971,112 1,146,112 1,336,112

Less: Depreciation 344,135 396,987 453,241 524,769 604,610

Net Fixed Assets 304,383 318,245 517,872 621,344 731,502

Capital WIP 80,680 117,289 50,000 60,000 70,000

Goodwil l 34,229 35,848 40,937 40,937 40,937

Investments 22,191 25,443 89,177 89,878 90,729

Curr.Assets 425,296 506,995 705,933 742,637 815,912

Inventory 113,120 140,705 182,160 232,205 256,871

Sundry Debtors 71,912 65,257 82,368 124,203 137,396

Cash & Bank Bal. 87,433 114,096 182,381 94,258 87,672

Loans & Advances 152,807 178,422 249,952 291,952 333,952

Current Liab. & Prov. 417,208 491,378 710,564 793,817 878,141

Sundry Creditors 221,875 279,031 366,863 415,809 459,979

Other Liabilities 118,898 112,776 215,284 216,005 238,950

Net Current Assets 8,088 15,616 -4,632 -51,180 -62,230

Appl. of Funds 447,660 512,440 693,354 760,979 870,940

E: MOSL Estimates

Tata Motors

1 October 2012 21

Tata Motors: Financials and Valuation

Ratios (Consolidated)Y/E March 2010 2011 2012 2013E 2014E

Basic (INR)

EPS 5.3 28.4 39.6 33.9 41.7

EPS Fully Diluted 4.5 27.3 37.8 33.5 41.1

Normalized EPS ^ -4.3 15.4 22.2 14.2 19.3

EPS Growth (%) -79.9 -461.6 43.7 -35.8 35.7

Cash EPS 18.9 43.0 57.3 55.7 66.0

Book Value (Rs/Share) 28.8 60.1 103.0 127.5 163.3

DPS 1.2 4.0 4.0 4.5 5.0

Payout (Incl. Div. Tax) % 65.9 16.2 11.8 15.5 14.0

Valuation (x)

Consolidated P/E 7.1 8.0 6.5

Cash P/E 4.7 4.8 4.0

EV/EBITDA 4.4 3.7 3.1

EV/Sales 0.6 0.5 0.4

Price to Book Value 2.6 2.0 1.6

Dividend Yield (%) 1.5 1.7 1.9

Profitability Ratios (%)

RoE 18.3 47.3 38.4 26.6 25.5

RoCE 10.7 26.5 27.0 27.1 27.1

Turnover Ratios

Debtors (Days) 28 20 18 23 23

Inventory (Days) 45 42 40 43 43

Creditors (Days) 88 83 81 77 77

Asset Turnover (x) 2.1 2.4 2.4 2.6 2.5

Leverage Ratio

Debt/Equity (x) 4.3 1.6 1.2 0.9 0.7

Cash Flow Statement (Consolidated) (INR Million)Y/E March 2010 2011 2012 2013E 2014E

OP/(Loss) before Tax 47,270 131,595 180,751 199,168 228,780

Int/Div. Received 23,055 19,781 6,618 6,836 7,011

Depreciation 38,826 46,510 56,254 71,528 79,841

Direct Taxes Paid -12,292 -13,912 -37,980 -48,010 -55,781

(Inc)/Dec in WC 26,009 -40,484 88,534 -41,576 4,465

Other Items -28,408 -28,651 -18,951 -14,614 -16,019

Extra-ordinary Items -4,489 -7,773 -8,315 -4,405 0

CF after EO Items 89,971 107,066 266,910 168,927 248,296

(Inc)/Dec in FA+CWIP -84,532 -81,128 -188,592 -185,000 -200,000

(Pur)/Sale of Invest. 9,202 10,471 -63,735 -700 -852

CF from Inv Activity -75,331 -70,657 -252,327 -185,700 -200,852

Issue of Shares 15,167 31,561 14,958 211 0

Inc/(Dec) in Debt 45,300 -10,688 83,419 -24,162 -8,315

Interest Paid -28,553 -24,691 -29,822 -30,132 -26,530

Dividends Paid -3,496 -10,195 -14,853 -17,266 -19,185

CF from Fin Activity 28,417 -14,013 53,702 -71,350 -54,030

Inc/(Dec) in Cash 43,058 22,397 68,285 -88,123 -6,585

Add: Opening Bal. 41,213 87,433 109,830 178,115 89,992

Closing Balance 87,433 109,830 178,115 89,992 83,406

E: MOSL Estimates

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Tata Motors - The Smart Investor

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