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RESEARCH
EQUITY RESEARCH December 04, 2008
1,100 we expect TML’s performance to remain under pressure in the near term.
950
800 We have valued the Company by using the DCF technique, assuming a
650
500 WACC of 11.8% and a terminal growth of 5%. Our valuation suggest a
350
200 target price of Rs. 125, which translates into a potential downside of 17.2%
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from the current market price. Based on the Company’s bleak outlook and
our valuation, we have downgraded our rating from Hold to Sell.
TTMT Rebased BSE Index Key Figures (Standalone)
Quarterly Data Q2'08 Q1'09 Q2'09 YoY% QoQ%
(Figures in Rs. mn, except per share data)
Net Sales 65,946 69,284 70,293 6.6% 1.5%
Adj. EBITDA 7,760 5,225 5,649 (27.2)% 8.1%
Adj. Net Profit 5,007 4,076 6,232 24.5% 52.9%
Margins(%)
EBITDA 11.6% 7.5% 8.0%
NPM 7.5% 5.9% 8.8%
Per Share Data (Rs.)
Adj. EPS 11.8 9.6 14.7 24.2% 52.9%
Please see the end of the report for disclaimer and disclosures. -1-
TATA MOTORS LIMITED
RESEARCH
EQUITY RESEARCH December 04, 2008
Exports 13,843 12,930 (6.6)% EBITDA decreased 27.2% yoy to Rs. 5.6 bn and the margin declined
365 bps to 8% in Q2’09. The fall in the EBITDA margin was driven by higher
Total 136,573 135,037 (1.1)%
raw material costs, primarily due to the unprecedented increase witnessed
in steel prices. Though we expect raw material costs to decline in the
coming quarters due to the recent downturn in the commodity cycle,
margins will remain under pressure as TML is likely to pass on the cost
benefit to the consumers. Notwithstanding the decrease in the EBITDA, adj.
net profit surged 24.5% yoy to Rs. 6.2 bn, and the net profit margin
expanded 130 bps to 8.8%. The increase in the net profit margin was due to
a lower effective tax rate.
Please see the end of the report for disclaimer and disclosures. -2-
TATA MOTORS LIMITED
RESEARCH
EQUITY RESEARCH December 04, 2008
Key events
• The Company shifted the base of its Nano plant from Singur, West
Bengal, to Sanand, Gujarat. Meanwhile, the Gujarat government offered
a loan of Rs. 95.7 bn to Tata Motors for the Nano project, with a soft
0.1% simple rate of interest.
• In order to avoid the unnecessary inventory build-up amid the scenario
of declining demand, the Company shut down production for three-five
days across all its plants.
Outlook
TML’s sales volume has been trending downwards over the past few
quarters. While its October sales volume decreased 19.8% yoy, despite
being a festive season, the sales volume in November tumbled 29.3%. We
expect this declining trend to continue in the coming quarters, given the
cautious lending policy adopted by the banks, the decline in consumer
spending, and the slowing economy. Though the Nano’s launch has been
Please see the end of the report for disclaimer and disclosures. -3-
TATA MOTORS LIMITED
RESEARCH
EQUITY RESEARCH December 04, 2008
postponed because of the Singur imbroglio, it will help restrict the fall in
volumes.
To add to the Company’s woes is its JLR business, for which it raised a
USD 3 bn bridge loan. In order to partly finance its bridge loan, TML offered
a rights issue of Tata Motors in September 2008; however, it received a
lukewarm response, given the slowdown in the capital markets. Thus, we
believe that the Company would have to get its bridge loan refinanced;
raising a fresh loan or seeking finance from the capital markets would be
difficult because of the global liquidity crisis. Thus, the Company’s finance
cost will continue to pressurise its profitability. Further, JLR’s sales volume
is on a declining trend, and given the current economic conditions in the US
TML cut production at its and Europe, we do not expect the sales volume to recover soon. Therefore,
Jamshedpur and Pune plants to we expect the Company’s performance to remain under pressure in the
adjust to the slowdown
upcoming quarters.
The global rating agency Moody's has lowered TML’s corporate family
rating from Ba2 to B1 because of a reduction in demand in both the
domestic and international markets. The Company is now in the 'non-
investment grade', with little assurance of long-term payments.
At the CMP, the stock trades at a forward P/E of 5.8x and 6.1x on its FY09E
and FY10E earnings, respectively. We have valued the Company by using
the DCF valuation, assuming a WACC of 11.8% and a terminal growth of
5%. Our valuation suggests a target price of Rs. 125, which translates into a
potential downside of 17.2% over the CMP. Hence, we have downgraded
our rating from Hold to Sell.
Margins(%)
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