Overweight rating on Tata Motors; New model cycle to be the driver

2015, a slow year: Tata Motors underperformed the Sensex by 20% last year as the high-margin China market slowed down, new model ramp-up was slower than market expectations and JLR margins came down from 19% in F2Q15 to 12% in F2Q16. Despite a mixed macro outlook for 2016, we believe TTMT will have a better year ahead.

Jaguar’s best phase ever: We introduce the Morgan Stanley Proprietary model cycle index and note that Jaguar is embarking on its most ambitious model cycle since 2000, and we expect 34% FY15-18 volume CAGR (compound annual growth rate) in the brand. Land Rover will also launch two new models in 2016, making JLR one of the fastest-growing brands globally. Stable XE mix, leverage gains and lower discounts on new models will help JLR margins expand from 12% in F2Q16 to 15.5% in FY18.

China’s contribution is going down: We estimate China to account for ~20% of FY17 JLR net sales vs. 36% in FY14, so JLR would be less exposed to a sharp slowdown in China. Further, JLR is a UK-based exporter, so its earnings are unlikely to be hampered by potential USD strength.

Our AlphaWise survey of 300 fleet operators suggests that contrary to our/Street expectations, TTMT is set for market share rebound in domestic trucks. Given better earnings visibility, we now use PE (price-to-earnings ratio) to value the India business (was PB). We still value JLR at 7x PE. We cut our TTMT FY16 earnings forecasts by 12% as we build in full impact of the Tianjin blast in August 2015 and FY16 volume weakness. Our PT (price target) falls 9%, but we think value still looks attractive at ~25% discount to peers, at 7.1x FY17e P/E (8.3x adjusted for R&D) vs. 9x for BMW for 2016e/FY17.

Tata Motors