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.
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