CMP: Rs 340 Target Price: Rs 225
Tata Motors' (TML) consolidated results were signficantly below expectations, primarily due to JLR. Against our expectation of net loss of USD 400 mn, the company reported a loss of approximately 800 mn (before adjusting for capitalisation of R&D expenses). Adjusting for capitalisation of R&D expenses, net loss stood at USD 504 mn. Consolidated adjusted net loss stood at Rs 27 bn of Rs 53 per share (19% of the book value). For FY10, while we have factored in positive EBIDTA in our assumption, we expect company to report net loss of USD 62 mn (after capitalizing 90% of R&D spend). Also, we expect the business to remain FCF negative in the near to medium term.
The good part is
n The pressure on profitability is due to rising subventions (up by 50% since 2HCY08), rather than due to internal inefficiencies. Other expenses as % of sales stood at 26% for JLR.
n TML postively surprised us on the cost control initiatives and continuance pf product development programs.
n Concerns on the availability of funds to pursue the capex programes have been largely addressed for next 12 to 18 months.
n The perfromance of JLR is more dependent on recovery of the industry rather than internal product related improvement
We maintain our target price of Rs 225 and our SELL rating on the stock. We have valued TML standalone business at Rs 175 per share (3x EV/EBIDTA) and subsidiaries at Rs 50 per share. We have not assigned any value to JLR. At our target price, the stock would trade at P/B of 1x 09consolidated), after factoring in the loss at JLR, which is in line with the trough valuation during 2000-01. In our P/B calculation we have ignored goodwill per share of Rs 59 due to acquisition of JLR.
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