Recommendation: Hold
CMP = Rs 396 (at the time of this recommendation)
Price target: Rs 545
Key points:
- Q1FY2009 results of Tata Motors are not satisfactory mainly because of lower-than-expected margins. However, its PAT is higher than estimated earlier, mainly on account of a higher other income and a lower tax outgo during the quarter. The net sales for the quarter grew by 14.4% to Rs 6,928.4 crore on the back of a 3.9% volume growth and a 10.1% realisation growth during the quarter.
- Domestic sales of commercial vehicles increased by 16% while that of passenger vehicles declined marginally. The export sales volume declined by 34%. An increase in the overall expenses, such as raw material cost, employee cost and other expenses, resulted in decrease in the operating profit margin by 130 basis points. Hence, the operating profit dropped by 3% in this quarter.
- A higher other income and a lower tax outgo helped the adjusted PAT to grow by 59.3%. After accounting for a forex loss of almost Rs 200 crore and a profit of Rs 113.7 crore on the sale of the stake in Tata Auto Components, the reported net profit declined by 30.1% to Rs 326.2 crore. Tata Motors has not reported the consolidated results for Q1FY2009 since the financial statements of Jaguar and Land Rover are under compilation and have not been finalised yet. However the performance of the new subsidiaries was also affected by the rising commodity prices and interest rates during the quarter.
- At the current levels, the stock trades at 6.5x its FY2010E consolidated earnings and is available at an enterprise value/earnings before interest, depreciation, tax and amortisation of 3.1x.
- I maintain a Hold recommendation on this stock with a price target of Rs 545.
