Buy retained on Tata Motors – TP hiked to Rs.1400

 Buy call on Tata Motors is reiterated with an increased target price of Rs.1400 over one year. The upgrade is due to excellent performance of the company in 2QFY11.

 The company has reported a stellar quarter, driven by significant revenue and margin surprises from Jaguar Land Rover (JLR).

 Consolidated Operating profit beat the street estimate by 11% and EPS is higher than expectation by 39% on lower amortization and higher other income.

 Domestic business of the company looks challenging due to loss of market share in car segment (except Nano) and CV segment. However, volume and margin outlook for JLR appears extremely strong.

 Average sales price for JLR has improved by 6.6% q-q and consequently, revenue from this segment is higher than market expectations. Operating profit margin also improved by 110 bps q-q helped by product mix, cost cutting initiatives and partial currency hedge.

 It seems that cost cutting benefits are not yet over and it is likely to accrue for the next many quarters.

 Monthly sales for JLR is likely to improve further due to robust demand for the vehicles.

 JLR has started to generate strong cash flow and it seems that this segment could become zero debt by the end of FY12, if the cash is used by the management for repayment of debt. If the leverage is maintained, surplus cash would be used for hefty dividend payment from JLR to Tata Motors next year.

 Based on strong performance of JLR, earnings estimates for FY11 and FY12 have been hiked by 17.6% and 12.7% respectively and the target price has been hiked to Rs.1400 from the earlier projection of Rs.1170. Buy is reiterated at the current price of Rs.1270 range.


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