We upgrade Tata Motors to outperform with a target price of R390. We use a sum-of-the-parts methodology for Tata Motors, where we value the domestic business (R90 per share) at 7x December 2012 ebitda. We value JLR (R303 per share) at 4x December 2014 ebitda, along with other subsidiaries (R23 per share) and net of debt (R27 per share).
The new Range Rover volumes are likely to surprise. Our channel checks with Chinese dealers (done by the Chinese Autos team) suggest that dealers expect to sell nearly 30,000 Range Rovers in China alone. Hence, we upgrade our Range Rover estimates from 35,000 units to 50,000 units for FY14.
We believe, the new Range Rover can drive more than 10% average selling price (ASP) increase for the company over next few quarters. Combined with Range Rovers being a high margin product, we expect JLRs margins to expand around 200 basis points over next few quarters. Jaguar has a number of new launches lined up the new F type, all-wheel drive (AWD) models for US market and XF Sportbrake for the European market which will boost utilisation levels at Jaguar from 70% to around 85% and improve margins at the loss-making Jaguar as well.
As a result, we are increasing our FY14/15 estimates on Tata Motors by over 25% on back of both higher volume and margin assumptions. We believe that not only is the market underestimating the volumes of the new Range Rovers, it is also underestimating the impact of the product on ASPs and JLR margins. Our estimates are nearly 15% higher than consensus. While the stock is up nearly 15% in past three months, it has underperformed peers like BMW, which is up around 30%.
Moreover, consensus earnings have largely remained stable in this up-move, hence, with our expectation of earnings upgrades kicking in we believe the stock has more upside. The key risk to our call is a slowdown in the Chinese luxury car market, which would result in a significant deterioration in both volumes and margins in China.