We maintain our ‘reduce’ recommendation on Tata Motors as weakening product mix and higher capex costs, driven by regulatory and customer requirements, are expected to keep FCF of the company negative in FY14.
We also maintain our earnings estimates and EV/Ebitda multiples for the company (4x for JLR, 7.5x for standalone business) on FY14e Ebitda. We assign a 30% holdco discount to fair value of other subsidiaries that helps us arrive at an sum-of-the-parts (SOTP) based target price of R253.
Tata Motors' domestic business disappointed significantly as the company reported a net loss of R450 crore against a profit of R260 crore in Q3FY12. Ebitda margin came in at 2.2% as all cost items stood higher.
Low sales volume and average realisation also dragged down revenue (down 20% y-o-y and 15% q-o-q). While JLR disappointed on the top line front (R380 crore versus an estimate of R400 crore) due to lower average realisation, its Ebitda margin (under IFRS) at 14.0% surpassed our 12.5% estimate.
Though JLR’s Ebitda margin was better than our estimate, it was the second lowest in the past 11 quarters. Ebitda per vehicle declined 10% q-o-q and 24% y-o-y. While refraining from commenting on profit per vehicle, the management guided for Ebitda margin of ~14% in FY14 due to high marketing expenses related to new launches.
After the Q3FY13 results, the management said the medium and heavy commercial vehicle (MHCV) segment is likely to remain under pressure for at least 1-2 quarters, even if the economic situation starts improving. Further, JLR's new product launches would keep marketing expenses elevated.
The management also said the company is expanding its dealer network for the passenger car segment and plans to come out with refreshes and new products at regular intervals.
The small commercial vehicle segment is likely to maintain growth momentum. Marketing costs are likely to remain higher due to competitive intensity. Tata Motors intends to expand its Chinese dealers' count in the future. The company said depreciation will have a rising trajectory on introduction of new products due to amortisation of R&D.