Event Update - Tata Motors DVR (switch from Tata Motors to Tata Motors DVR)
Tata Motors Q2 above estimates – strong JLR show continues; JLR’s new products ramp-ups boosted the profitability; Standalone concerns remain firm; Recommend to accumulate and switch from Tata Motors to Tata Motors DVRs for the holders of Tata Motors stock. DVR trades at 47% discount to Tata Motors & recent increase in FII holding limit upto 75%, would aid to reduce the gap in the medium term.
During Q2FY14, Tata Motors’s consolidated topline grew by 31.1% to Rs. 568.82 bn as against Rs. 434.02 bn (YoY). JLR continued to lead the revenue pack, up 40.3% to £4612 mn from £3288 mn on YoY basis. On geographical basis, China increased by 62.2% to 26% of the total JLR volumes. Persistent macro-economic stress continued to reflect in the domestic numbers; Volume down by 32.5% (CV down 25.3% & PV down 51.2%) and revenue declined by 28.9% on YoY basis. Cons EBITDA improved by 61.9% to Rs. 86.34 bn from Rs. 53.34 bn on YoY basis, with 289 bps margin expansion to 15.18% (YoY). Stress in M&HCV & PV volumes led to whooping standalone margin slump of 432 bps to 0.9% on YoY basis. Nevertheless, rich products mix (Jaguar 18.6% vs 12.8% of total JLR volume in Q213, up 92%) helped JLR to expand OPM significantly by 306 bps to 17.8% levels (includes £79 mn worth of local incentives vs £36 mn in Q213). Adjusting for this also, margin has remained strong at 16.1% vs 13.7% in Q213. Reported PAT jumped by 70.7% to Rs. 35.42 bn on YoY basis.
The results were ahead of estimates, despite steep loss by domestic operations (Rs. 8 bn). On JLR front, a) Outlook remains healthy; b) products moving towards richer mix (New Range Rover, F-TYPE, XF Sportbrake), and c) slew of new launches augur well for the company in the medium term. JLR maintained its capex plan at £2.75 bn for FY14 and confident of supporting bulk of it through operating cash flow (FCF of £430 mn, post capex and product development of £595 mn in Q214). We believe that the strong JLR’s performance would continue support the stock and cyclical nature of domestic CV business (~16% of cons revenues) would remain a drag. On YTD basis, Tata Motors outperformed the benchmark by 20%+ on the back of strong JLR performance (new products acceptance), which led to a close to global peers valuation. We recommend investors to accumulate and switch to Tata Motors DVR, as the discounts are at 47% and recent increase in FII limit upto 75% (from 61.04%, but FII limit retained at 35% for Tata Motors shares) would aid to reduce the gap in the medium term. Firstly it releases cash, secondly higher dividend yield (yield doubles because of 47% discount, moreover DVRs command 5% higher dividend than ordinary shares of Rs. 2 face value, i.e., 0.10) and thirdly it has potential to offer superior appreciation than Tata Motors.
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