We maintain our ‘neutral’ rating on Tata Motors and set a 12-month target of R284, based on a SOTP methodology. We assign EV/Ebitda multiple of 3x for Jaguar Land Rover (JLR), in line with other luxury original equipment manufacturers.
We value the standalone business at R51.8 per share, based on 7.0x one-year forward standalone Ebitda (average of FY14f and FY15f). We value JLR at R201.6 per share, based on 3.0x FY14f one-year forward normalised Ebitda of R23,920.6 crore. We value other investments at R30.5 per share.
We see 25-30% down side to our JLR’s Q3FY13 PAT estimates. We believe that, because of weaker product mix, ASPs can decline sequentially in Q3FY13. Thus, Ebitda margins could be around 13-14% for Q3FY13 compared to our current estimate of 15.7%. Our JLR’s Q3FY13 PAT estimate could come down to around £260-280 million from £369 million currently.
Consolidated PAT estimate for Q3 could fall to R2,200 crore from £3,100 crore currently. We believe that the market may have been expecting a positive margin surprise from JLR results as volumes were up 23% q-o-q, which will give operating leverage benefits and, historically, Q3 margins have been higher. After this announcement, the market may look to cut earnings estimates for JLR.
We continue to believe that full-year margins should be in the range of 14-15% for the company over the next couple of years and do not see any significant change to our margin outlook. However, the market may have a rethink on giving multiples to JLR, which are higher than the rest of the luxury car companies, as the free cash flow is likely to be negative for JLR in FY14.
The management has hinted at capex of £1 billion for product development and £1.75 billion towards manufacturing capacity for both vehicles and engines. Management expects capacity to increase to 500,000 units on 3-shift basis from 400,000 units currently. We believe that this reflects a positive demand outlook, but the entire increase in production capacity may not reflect increase in actual production as the company wants to operate on 2-shift basis from 3-shifts currently.