Tata Motors

TATA MOTORS LIMITED RESEARCH EQUITY RESEARCH

December 31, 2007

RESULTS REVIEW

Tata Motors

Hold Buy

Poised for growth

Share Data Market Cap

Rs. 286.1 bn

Improved price realizations underscored the performance of the Company in

Price

Rs. 742.1

the second quarter, however we are yet to see traction in the volumes. We

BSE Sensex

20,286.99

believe that interest rate cycle has peaked and any reduction in the interest

Reuters

TAMO.BO

Bloomberg

TTMT IN

Avg. Volume (52 Week)

0.3 mn

52-Week High/Low

Rs. 974.80/616.15

Shares Outstanding

385.5 mn

rates will lead to increasing volumes. Looking at the quarter, net sales increased by 5.2% yoy to Rs. 81.3 bn driven by higher average price realizations of 4%, partially offset by 2.8% decline in volumes. Adj EBITDA increased 7.1% to Rs. 9.6 bn and EBITDA margin improved 20bps. The Company undertook cost reduction initiatives which helped improvement in margins. However, adj. net profit decreased 7.4% to

Valuation Ratios (Consolidated) Year to 31 March

Rs. 4.9 bn and net margin contracted 82 bps yoy to 6% due to lower other

2008E

2009E

45.0

53.0

(12.8)%

17.8%

We have revised our net sales estimate downwards for FY08E and FY09E

16.5x

14.0x

by 5% and 2%, respectively, to factor in the dip in volume growth during

EV/ Sales (x)

1.0x

0.9x

H1’08. However, we estimate the volumes to pick up in the forthcoming

EV/ EBITDA (x)

8.4x

7.2x

quarters on the back of new product launches, approaching festive season

EPS (Rs.) +/- (%) PER (x)

income and higher interest expense.

and possible reduction in interest rates. At the current price, the stock is trading at 16.5x for FY08E and 14x for FY09E earnings. Based on our

Shareholding Pattern (%) Promoters

33

valuation, we continue to remain positive on the long term growth prospects

FIIs

16

of Tata Motors (TTMT), and reiterate our Buy rating on the stock with a

Institutions

17

revised target price of Rs. 920 for FY09E.

Public & Others

34

Result Highlights During Q2’08, the Company’s volumes continued to get adversely impacted

Relative Performance

by the high level of interest rates. Commercial vehicle segment remained flat 1,500 1,200 900 600

Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07

300

TTMT

Rebased BSE Index

Key Figures (Consolidated) Quarterly Data Q2'07 Q1'08 Q2'08* (Figures in Rs. mn, except per share data)

YoY%

QoQ%

Net Sales Adj. EBITDA Adj. Net Profit

5.2% 7.1% (7.4)%

6.5% 144,580 13.7% 17,035 32.4% 9,445

77,247 8,943 5,289

76,313 8,418 3,701

81,292 9,574 4,899

H1'07

H1'08

157,605 17,992 8,502

YoY%

9.0% 5.6% (10.0)%

Margins(%) EBITDA NPM

11.6% 6.8%

11.0% 4.8%

11.8% 6.0%

11.8% 6.5%

11.4% 5.4%

Per Share Data (Rs.) 13.1 9.1 11.6 (11.5)% 26.5% 24.6 20.5 Adj. EPS *Net sales excludes extra ordinary item of Rs. 760 mn on account of transfer of technology

Please see the end of the report for disclaimer and disclosures.

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(16.7)%

TATA MOTORS LIMITED RESEARCH EQUITY RESEARCH

December 31, 2007 as against the industry growth of 5% yoy, whereas, Passenger vehicle segment dipped 6.9% yoy as compared to the industry growth of 11.8% yoy. Export volumes declined 1% yoy to 13,780 units due to stronger rupee.

Quarterly Data

Q2'07

Q2'08

YoY%

Domestic M&HCV LCV Total CV

40,787 30,443 71,230

36,121 35,051 71,172

(11.4)% 15.1% (0.1)%

Small Mid-Size UV Total PV

34,555 8,327 11,506 54,388

33,869 7,111 9,657 50,637

(2.0)% (14.6)% (16.1)% (6.9)%

Total Domestic

125,618

121,809

(3.0)%

13,920

13,780

(1.0)%

139,538

135,589

(2.8)%

Exports Total

Commercial vehicle (CV) segment remained flat at 71,172 units as the dip in M&HCV segment was offset by a substantial growth in the LCV segment. The strong growth in LCVs was led by Tata Ace, especially the new version Magic and Winger, which received an astounding response. However, M&HCV suffered a setback due to higher freight charges and rising interest rates. As a result, the market share of the CV segment dipped 310 bps yoy to 61.5%. Passenger Vehicle (PV) segment registered a decrease of 6.9% on the back of steep decline in the mid-size and UV segments. Small Car volumes contracted 2% yoy to 33,869 units, Mid-size car volumes dipped 14.6% yoy

Constant fluctuations in the interest rates hampered the demand in the PV segment

to 7,111 units, and Utility Vehicles decreased by 16.1% yoy to 9,657 units. Higher interest cost discouraged consumers from purchasing new cars. Moreover, the mature portfolio of the Company as against the new launches by the competitors also led to the dip in sales volume. Owing to the above mentioned

factors,

market

share

registered

a

sharp

decline

of

280 bps yoy to 13.6% in Q2’08. Despite a fall of 2.8% in volumes, net sales (excluding the extra ordinary item of Rs. 760 mn on account of transfer of technology) increased 5.2% yoy to Average vehicle realization increased 4% yoy during the quarter

Rs. 81.3 bn. The increase in net sales was driven by better price realizations and reduction in excise duty by 56 bps during Q2’08. Also contributing to the rise was a robust performance by the Company’s subsidiaries. For the quarter ended Sep’07, Adj. EBITDA (excluding forex gains on revaluation of loans) increased 7.1% yoy to Rs. 9.6 bn and EBITDA margin improved 20 bps yoy to 11.8%. The improvement in EBITDA margin was a result of the cost reduction measures undertaken by the Company which led to 104 bps yoy decline in other expenditure to 11.8% of net sales. However, the increase was partially offset by higher raw material (57 bps yoy to 68%) and staff cost (27 bps yoy to 8.2%) as a percentage of net sales. The rise in raw material cost was a result of change in product mix and higher prices of the materials.

Please see the end of the report for disclaimer and disclosures.

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TATA MOTORS LIMITED RESEARCH EQUITY RESEARCH

December 31, 2007 In spite of the increase in Adj. EBITDA, adj. net profit declined 7.4% yoy to Rs. 4.9 bn. In addition, net profit margin dipped 82 bps yoy to 6% as a result

Effective tax rate went down 167 bps yoy to 24.4%

of lower other income (down 31 bps yoy to 0.9%) and higher interest expense (133 bps yoy to 2.6%) as a percentage of net sales. The fall in net profit margin was curtailed by lower effective tax rate.

Key Events •

Tata Motors introduced new range of M&HCV which includes multi-axle trucks, heavy-duty trucks, tractor-trailers and tippers, etc.

•

During the quarter, the Company achieved the significant milestone of rolling out its one millionth car off the Indica Platform.

•

The Company has recently launched new Indica V2 and new extra fuel efficient Sumo Victa Turbo DI range.

Key Risks •

Tata Motors seems to be the most preferential bidder for the acquisition of two major 4 wheeler brands, Jaguar and Land Rover. These acquisitions by the Company may pose a risk to our rating.

•

Tata Motors has incurred a large capex and R&D expense on the ‘one lakh car’. Any unforeseen delay or increase in expenses or less than expected response from market will have a negative impact on the Company’s bottom line.

•

In the recent past, prices of several inputs such as steel, non-ferrous metals, rubber and engineering plastics have witnessed an upward movement. A further rise in input costs and interest rates could affect the profitability of the Company.

Outlook We continue to hold a positive outlook on the Company’s growth prospects, despite its subdued performance during Q2’08. We expect the volumes to pick up in the forthcoming quarters on the back of new product launches, Please see the end of the report for disclaimer and disclosures.

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TATA MOTORS LIMITED RESEARCH EQUITY RESEARCH

December 31, 2007 infrastructure development, growth in industrial production and softening of interest rates. With the launch of new M&HCV as well as the recent alliances with Iveco, Marcopolo and the global truck project in line, the CVs segment is

Volumes likely to revive by FY09E

expected to regain its growth momentum. In addition, with the completion of capacity expansion program, no further engine supply disruption is expected for the CV segment. The Company is already prepared to address the CV demand adequately in case the demand goes up, as there appears to be some easing out on the demand front and the sector appears to move a shade better. Increasing choice for the customer and softening of interest rates would serve as a significant growth driver of PV demand. With Tata’s small car in the pipeline, new product launches, PV sales in India hitting 1.4 mn units last year and forecasted to nearly double by 2010, we are bullish on the performance of the PV segment in the near future. However, limited products and reducing shelf life of vehicles remains a matter of concern in the growing auto market. We have revised our net sales estimate downwards for FY08E and FY09E by 5% and 2%, respectively, to factor in the dip in volume growth during the H1’08. At the current price, the stock is trading at 16.5x for FY08E and 14x for FY09E earnings. Based on our valuation, we continue to remain positive on the long term growth prospects of TTMT, and reiterate our Buy rating on the stock with a revised target price of Rs. 920 for FY09E. Key Figures (Consolidated) Year to March

FY05

FY06

FY07

FY08E

FY09E CAGR (%)

(Figures in Rs. mn, except per share data) Net Sales

(FY07-09E)

195,328

237,695

324,264

339,678

382,703

8.6%

Adj. EBITDA

24,295

29,765

40,308

41,851

48,360

9.5%

Adj. Net Profit

13,246

16,756

21,017

18,358

21,620

1.4%

Margins(%) EBITDA NPM Per Share Data (Rs.) Adj. EPS PER (x)

12.4% 6.8%

12.5% 7.0%

12.4% 6.5%

12.3% 5.4%

12.6% 5.6%

34.5 12.0x

41.8 22.3x

51.6 14.4x

45.0 16.5x

53.0 14.0x

Please see the end of the report for disclaimer and disclosures.

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1.3%

TATA MOTORS LIMITED RESEARCH EQUITY RESEARCH

December 31, 2007

Disclaimer This report is not for public distribution and is only for private circulation and use. The Report should not be reproduced or redistributed to any other person or person(s) in any form. No action is solicited on the basis of the contents of this report. This material is for the general information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be considered as an offer to sell or the solicitation of an offer to buy any stock or derivative in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Indiabulls Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. You are advised to independently evaluate the investments and strategies discussed herein and also seek the advice of your financial adviser. Past performance is not a guide for future performance. The value of, and income from investments may vary because of changes in the macro and micro economic conditions. Past performance is not necessarily a guide to future performance. This report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Any opinions expressed here in reflect judgments at this date and are subject to change without notice. Indiabulls Securities Limited (ISL) and any/all of its group companies or directors or employees reserves its right to suspend the publication of this Report and are not under any obligation to tell you when opinions or information in this report change. In addition, ISL has no obligation to continue to publish reports on all the stocks currently under its coverage or to notify you in the event it terminates its coverage. Neither Indiabulls Securities Limited nor any of its affiliates, associates, directors or employees shall in any way be responsible for any loss or damage that may arise to any person from any error in the information contained in this report. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject stock and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. No part of this material may be duplicated in any form and/or redistributed without Indiabulls Securities Limited prior written consent. The information given herein should be treated as only factor, while making investment decision. The report does not provide individually tailor-made investment advice. Indiabulls Securities Limited recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. Indiabulls Securities Limited shall not be responsible for any transaction conducted based on the information given in this report, which is in violation of rules and regulations of National Stock Exchange or Bombay Stock Exchange.

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