n Tata Motors DVR discount at 45.2%: The average discount for the DVR to Tata Motors’ ordinary share was 36.7% since inception. The average discount for the DVR share over the last two years has been 40.5%. At the CMP, the DVR is trading at a 45.2% discount to Tata Motors’ ordinary share. We believe that at the current levels the probability of the discount narrowing is higher.
n Tata Motors’ SOTP Valuation stands at Rs322/share: We value JLR at 4.0x FY13E EV/EBITDA multiple at Rs251/share. We value standalone business at 9.0x FY13E EPS at Rs45/share, whereas we value the other subsidiaries at a 30% holding discount at Rs26/share. At our SOTP based target price of Rs322, we see an upside potential of 23.8% in the stock from the current levels.
n We recommend BUY on Tata Motor DVR: The DVR has corrected 18.9% in the last one month compared to a 16.0% correction in the Tata Motors’ stock. We believe that the current price has discounted all the negatives and the risk- reward has turned favourable. DVR is trading at a valuation of 3.2x FY13E EPS and 4.1x FY13E adjusted EPS (adjusted for R&D being expensed rather than capitalized). We recommend ‘BUY’ on Tata Motors’ DVR stock.
n We expect 22%+ volume growth in H1FY13E for JLR: We maintain our volume estimate for JLR at 3.63lac units, translating into a growth of 15.6% YoY for FY13E. On account of low base and higher contribution of ‘Evoque’ (monthly run-rate of 8,000 units), we expect H1FY13E volume growth at 22.7% YoY. Hence, with two new launches i.e. Jaguar XF station wagon in Q3FY13E and new Range Rover platform in Q4FY13E, we have built in 8.5% YoY growth in H2FY13E, which in our view, is conservative.
n Risk: Reward favourable: Our base case Target Price (TP) for ordinary Tata Motors stands at Rs322. Assuming a 42% discount, the derived TP for Tata Motors DVR stands at Rs187, an upside potential of 31.6%. Assuming the current 45% discount continues, the derived value for DVR would stand at Rs177, an upside potential of 24.6%.
n Q4FY12E consolidated profit likely to increase by 65.3% YoY: Our estimate for Q4FY12 consolidated profit of Tata Motors stands at Rs40.5bn, a growth of 65.3% YoY. 90% of the consolidated profit is likely to be contributed by JLR. We believe the recent correction of ~18.0% correction in Tata Motor DVR provides a good entry point for investors. Any reduction in the discount from the current 45.0% could add as fillip to the overall stock returns.
n Tata Motors trading at discount compared to its global peers: Adjusted for R&D expenses, Tata Motors is trading at 7.4x FY13E EPS and 6.5x FY14E EPS. The Global peers are trading at 7.0-9.0x FY13E EPS and 6.0-8.0x FY14E EPS, with a 10-15% RoE as against 40-45% ROE for Tata Motors. Given the success of its new launches and higher RoEs, we believe Tata Motors’ valuations are attractive.
©Prabhudas Lilladher Pvt. Ltd.
The opening days trading of Facebook shares shows that of the 43m traded at $38 they almost all happened at the bid. The investment banks behind the IPO are permitted to undertake ‘stabilisation’ with the stock they have. This prop trading by them may or may not make them money – but clearly they don’t want the price falling below $38. It will as pressure mounts, not least from hedge funds, who will see an opportunity to rape and pillage Facebook’s shareprice.
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Finished my recording yesterday at the office with Emily Maitliss for the Money Programme to be broadcast on Monday about Facebook. Bottom line: A good company does not nec equal a good investment.
Tomorrow I will be interviewed by Emily Maitliss for the Money Programme about the valuation of Facebook. Should you buy some shares in Facebook? How do you judge if a company is overvalued anyway?
Well the company will raise $10billion – that’s the most by a technology company ever. More than Google raised. It values the company as a whole at just under $100 billion. But is it overvalued as a company – as a stock?
There are only ever two reasons to buy a stock; either for the short-term where you think future expectations are not priced into the company’s share price and it will lead to surprises that will cause the shares to rise.
Or you think for the long term all the revenues it will generate, dividends it will pay, share prices rises it will as a consequence generate, are today being discounted too greatly and therefore the stock is undervalued. This is what we fund managers call the net present value or discount cashflow model.
The way it works is this – you treat a stock like any asset eg a house. What is all the income you will ever earn from it? That is then valued at having it today, because £10 in a year is not worth the same as having £10 today.
Let’s take the short-term. Surely no one would argue that the market is under-pricing the over-exuberant expectations for Facebook. Granted, at the IPO (initial public offering), when it first hits the market, it will rise, because retail investors, renowned for being wrong, will drive it higher. But then what? The clever institutions and smart money will start moving it lower I suspect by selling at this premium price driven by excited retail investors. So ride the bandwagon, but just make sure you jump off before the cliff – just like in the good ol’ dot-com era days.
What of the long-term? The maths is tricky. Essentially it comes down to how do you value a company? A company is simply worth, as mentioned above, the net present value of all its future cash flows discounted to today. That means we need to know a discount rate – which can be thought of as the return someone wants for investing in something as risky as shares. Let’s say this is 10% per annum. And we also need to have an idea of growth of the company. Let’s say sales growth for the next seven years is maintained at Google’s average over the past 8 years which is roughly what Facebook grew last year – namely 80% per annum. What is the company worth? By my estimate around $75 billion – assuming sales growth of 80% per annum – which Google has maintained.
That would mean Facebook at IPO is pretty well valued or slightly overvalued.
We see the combination of the US Federal
Reserve’s (Fed) revised stance on employment,
its comments on the housing market, and the
sheer number of Federal Open Market
Committee (FOMC) members expecting a rate
rise before 2014, as a general indication of
increased hawkishness within the Fed. The
chances of a third round of quantitative easing
(QE3), in our view, therefore, now appear less
likely. This subtle shift potentially heralds an
upcoming opportune entry point into markets.
Earlier this week the FOMC, the Fed committee
responsible for setting interest rates, left rates on hold and
pledged to keep them very low until the end of 2014. The
committee repeated its commitment to keep the Fed’s
"balance sheet under review" and reiterated its willingness
to "act as appropriate". While all this was broadly in line
with previous FOMC pronouncements, we did see some
shifts in stance, particularly the assessment that growth is
"expected to pick up gradually" and that the housing
market was showing some “signs of improvement”.
In the FOMC press conference, Ben Bernanke, the Fed’s
chairman, continued to express the view that the recent
steep drop in unemployment would not be sustained.
However, this seems in stark contrast to purchasing
managers’ indices (PMIs), which suggest that the positive
trend in employment will continue. Indeed, this index
forms part of our rationale as to why we see a third round of
quantitative easing (central bank asset purchases), as less
likely. Nevertheless, despite expecting a slowdown in the
recent positive trend, the Fed did revise-up its
employment forecast to reflect the improvement in hiring.
The Fed’s forecast for unemployment now stands at 7.8-8%
for year-end 2012, from 8.2-8.5% in January, and 7.3-7.7%
On inflation, the FOMC nudged up its forecast by 0.35% to
1.9-2%. It was interesting to see that 13 out of 17 members
expect at least some sort of increase in rates before the end
2014 – this means that only four members expect no rate
rise! While all FOMC members make forecasts, only some
members have a vote and, conveniently for Bernanke, who
seems to retain a more dovish stance, four of the most
hawkish have no vote this year.
Overall, the FOMC statement and press conference gave
no signal that the Fed was actively considering another
round of QE. The major risk to this view is that
employment data deteriorates significantly between now
and the end of June, when ‘Operation Twist’ (the swap of
short-term debt with long-term debt to extend the average
maturity of the Fed’s balance sheet) ends.
In the past, an end to QE has typically led to a short-term
correction in risk assets. Thus it follows that the end of QE
in June could potentially represent an opportune entry
point into risk assets.