Stock Market Result Update on Tata Motors for 1QFY2012

Stock Market Result Update on Tata Motors for 1QFY2012 with an Accumulate recommendation.

Consolidated performance impacted by cost pressures and higher tax rate: Tata Motors (TML) reported in-line net sales growth of 24.1% yoy (down 5.7% qoq), led by healthy performance on the JLR (up 19.9%) and standalone (up 14.2%) fronts. Operating margin fell by 163bp yoy (flat qoq) to 12.6% due to input cost pressures in domestic and JLR operations and unfavourable currency movement. Net profit stood flat at `2,000cr (10.2% lower than our estimates), led by margin pressures, high interest cost as well as higher tax rate particularly at JLR.

Macroeconomic concerns and margin pressures restrict standalone growth: TML posted 14.2% yoy (down 18.5% qoq) top-line growth, led by 6.2% yoy (down 18.3% qoq) growth in volumes and 7.6% yoy (flat qoq) growth in net average realisation. Operating margin continued to be under pressure due to increasing commodity costs and negative operating leverage and stood at 8.1%, down 297bp yoy (down 41bp qoq). However, on account of lower interest cost and tax rate, net profit grew by 1.4% yoy (down 30% qoq) to`401cr.

Outlook and valuation:  We have revised our volume estimates downwards for JLR because of softening demand in key markets (US, Europe and UK); however, we believe the launch of Evoque will provide some respite going forward. We have also lowered our margin estimates, as we believe margin will remain under pressure due to commodity cost inflation. Thus, our earnings estimates have been revised down by 14% for FY2012 and 10% for FY2013. At `801, the stock is trading at 5.2x and 3.5x FY2013E P/E and EV/EBITDA, respectively. Following the steep decline in the stock price (~20% in the last one month), we believe the stock is available at reasonable valuations. Hence, we maintain Accumulate on the stock with a revised target price of `917 (`1,100).