We maintain our ‘buy’ rating on Tata Motors and raise the target price to R486 (earlier R421). We increase our FY15e and FY16e consolidated earnings by ~10 and 27%, respectively, as we explicitly forecast Chery JV’s numbers and hike domestic business ebitda. Our SOTP-based target price is JLR R405 (3.5x Q2FY16e ebitda), parent business R50 (1x Q2FY16e BVPS), subsidiaries R14, and Chery JV R55 (1x FY16e sales). Net debt/share is forecast at R38.
Jaguar Land Rover (JLR) is in a sweet spot of product life cycle. From being a niche premium-car player, JLR is now positioned to become the fourth global luxury-car maker (behind BMW, Audi and Mercedes Benz) with annual volume of ~5 lakh vehicles by FY16. A slew of new launches in the next 15-18 months should reduce J/LR’s average fleet age to 2-3 years — slightly bettering its peers — from ~5/3.5 years respectively.
Chery JV to help fully explore the China opportunity. China’s luxury-car market is expected to grow at ~15% over the next two years, and our forecast of ~1.6 lakh units in China for JLR by FY16 (including JV’s ~86,000 units) implies an ~8% market share. This provides JLR ample headroom for volume growth over the medium term.
An aging heavy-truck fleet (15% of fleet over 15 years) could drive replacement demand as emission norms change next year and aided by a slight recovery on the macro front. Tata Motors PV segment could benefit from new-model introductions in FY16. Yet cost-reduction initiatives are key to improving margins in FY16 (we forecast an ebitda margin of ~4% versus -0.9% in FY14).