**[investwise]** Tata Motors Drives Home On A Jaguar-Target Rs 1210 (Macquarie)

 

Macquarie Tata Motors: Outperform The management has outlined it's resolve to liquidate debt on the books of Jaguar-Land Rover. This is being done through massive group support through divestment in associate and subsidiary entities. Another $ 1 Bn will be raised through a Follow On Offering of Tata MT DVR's through a 9 per cent dilution in Equity.  More importantly a Jaguar version that counters Audi Q4-Q7 series and Benz E Class will target the upper middle class market for luxury sedans, that is outstripping demand in the process making India the third largest market by volumes after the US and China. Reaffirm Outperform: Tata Motors has benefited significantly from a revival in sales in domestic and developed markets on a macroeconomic recovery, and we expect the trend to continue. We believe aggressive cost-cutting measures being undertaken at JLR could further aid earnings growth over the next couple of years. Tata Motors reported solid 1Q FY11 results, supported by a solid performance by Jaguar Land Rover (JLR; unlisted). We maintain our Outperform as we believe that the recovery at JLR is sustainable and that the domestic commercial vehicle business remains on a growth track. Impact Solid set of numbers: Supported by strong growth in volumes in both the domestic and JLR businesses, Tata Motors reported consolidated operating income of Rs270bn (up 64% YoY) for 1Q FY11. The EBITDA margin improved by 300bp QoQ and was 14.6% for the quarter. Although stand-alone margins of 11.3% were lower than we estimated, JLR surprised positively. Consolidated PAT of Rs19.8bn, after minority interest, was significantly ahead of our estimate of Rs10.9bn and the Street estimate of Rs10bn. JLR reports solid set of numbers: JLR reported net sales of £2.26bn and profit of £221m for the quarter. While sales were 10% above our estimate, net profit was significantly above our estimate of £82m. The EBITDA margin improved by over 400bp QoQ and came in at 15.5%.  Apart from the various cost reduction initiatives being undertaken by the company, improvement in realisations of about 6.4% and favourable currency movement on the cost front led to an improvement in margins. We expect margins to decline from here as raw material prices are negotiated in the coming quarter and benefits from forex movements reverse. Committed to reducing leverage: Tata Motors' net automotive debt increased by 5% QoQ, mainly due to an increase in working capital, and was Rs199bn as of June 2010. However, net debt to equity fell marginally to 1.96:1.  Management remains committed to reducing net debt to below 1-times equity and has received shareholder approval to raise fresh funds of US$1bn through equity or equity-linked instruments. The company may also consider divesting its stake in subsidiaries to improve its leverage position. Earnings and target price revision Moving to consolidated numbers. We have reduced our stand-alone numbers by 5% and 1% for FY11 and FY12, respectively, and increased our respective consolidated earnings forecasts by 80% and 58%, mainly due to an increase in JLR estimates. TP raised to Rs1,210.00 from Rs920.00. Price catalyst 12-month price target: Rs1,210.00 based on a Sum of Parts methodology.  Catalyst: Improving domestic and JLR sales and quarterly numbers. Action and recommendation: BUY Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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