Standalone result highlights. Standalone Quarterly performance (Rs mn)

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1 RESULT UPDATE Arun Agarwal TATA MOTORS (TAMO) PRICE: RS.364 RECOMMENDATION: BUY TARGET PRICE: RS.423 FY15E P/E: 7.0X On a consolidated basis, TAMO's 3QFY14 results came in ahead of expectation supported by strong JLR margin performance. JLR reported excellent 3QFY14 results with revenues up by 40% YoY, EBITDA growing by 79% YoY and net profit growth of 109% YoY. TAMO's standalone business remained under pressure with the company reporting negative EBITDA. Reported profit on the standalone operations received boost from higher other income (stake transfer to 100% subsidiary) and significant tax writeback. Going ahead, Tata Motors standalone business is expected to continue reporting losses for some more quarters. New launches, improving geography mix and favorable product mix are expected to keep JLR's profitability growth healthy. We upgrade the stock to BUY (earlier ACCUMULATE) with price target of Rs423 (earlier Rs415). Standalone result highlights Summary table (Rs mn) FY13 FY14E FY15E Sales 1,888,176 2,312,547 2,700,127 Growth (%) EBITDA 245, , ,503 EBITDA margin (%) PBT 136, , ,497 Net profit 98, , ,957 EPS (Rs) Growth (%) (27.2) CEPS (Rs) Book value (Rs/share) Dividend per share (Rs) ROE (%) ROCE (%) Net cash (debt) (249,321) (309,949) (278,433) NW Capital (Days) (22) (23) (23) P/E (x) P/BV (x) EV/Sales (x) EV/EBITDA (x) Source: Company, Kotak Securities - Private Client Research Standalone Quarterly performance (Rs mn) (Rs mn) 3QFY14 3QFY13 YoY% 2QFY14 QoQ% Revenues 77, ,301 (26.9) 88,685 (12.4) Total expenditure 82, ,848 (21.5) 87,871 (6.4) RM consumed 59,628 80,073 (25.5) 65,835 (9.4) Employee cost 7,204 7,314 (1.5) 6, Other expenses 15,455 17,461 (11.5) 15, EBITDA (4,591) 1,453 (416.0) 813 (664.5) EBITDA margin (%) (5.9) Depreciation 5,122 4, ,191 (1.3) Interest cost 3,565 3,678 (3.1) 3, Other Income 19,881 1,118 1, ,509 Exceptional/Extraordinary items (389) (82) (2,820) (86) PBT 6,214 (6,013) (203.3) (9,835) - PBT margins (%) 8.0 (5.7) (11.1) Tax (6,300) (1,428) (1,800) 250 Tax rate (%) (101.4) Reported PAT 12,514 (4,585) (372.9) (8,035) - PAT margins (%) 16.1 (4.3) - (9.1) - Reported EPS (Rs) 3.9 (1.4) - (2.5) - Source: Company TAMO's standalone revenues declined by 27% YoY from Rs106,301mn in 3QFY13 to Rs77,697mn in 3QFY14. Decline in revenues were primarily due to lower passenger car and commercial vehicle volumes. Passenger car (PC) volumes and commercial volumes (CV) were down by 37% and 39% respectively. Average selling price during the quarter was higher by 13% YoY. On a sequential basis, revenues were down by 12% on the back of 4% decrease in passenger vehicle volumes and 17% fall in CV volumes. ASP's remained flat QoQ. Gross margins declined from 24.7% in 3QFY13 to 23.3% for the quarter under review which in our view was on account of higher discounts and product mix change. Over 2QFY14 too, gross margins slipped by 250bps which we believe was largely due to change in product mix. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 13

2 Employee cost for the quarter was marginally lower by 1.5% YoY at Rs7,204mn and other expenses declined by 12% YoY to Rs15,455mn. Lower volumes and cost control initiatives would have led to YoY decline in employee and other expenses. However, sequential increase in employee cost and other expenses came as a bit of negative surprise as we anticipated QoQ decline due to lower volumes and tight cost control measures. EBITDA margin for the quarter was negative at 5.9% on the back of weak sales and negative operating leverage. During the quarter, TAMO reported negative EBITDA of Rs4,591mn, as against positive EBITDA of Rs1,453mn and Rs813mn reported during 3QFY13 and 2QFY14 respectively. TAMO is making some restructuring under which Tata Motors (parent) is looking to transfer all overseas manufacturing company to TML Holding Pte Singapore. During the quarter, the company completed majority part of this restructuring with a small portion expected to get completed in 4QFY14. Accordingly, other income during the quarter received boost to the tune of Rs19,479mn from divestment in certain foreign subsidiary companies to TML Holding Pte Singapore. In the standalone financials, TAMO made a significant tax write-back to the tune of Rs6,300mn as the company reversed higher provisions made earlier. High other income and big tax write-back led to company reporting net profit of Rs12,514mn as against net loss reported during 3QFY13 and 2QFY14. AT PBT level (excluding Rs19,479mn gain on account of stake sale), the company reported loss of Rs13,265mn as against PBT loss of Rs6,013mn in 3QFY13 and Rs9,835mn in 2QFY14. JLR Result Highlights JLR Quarterly performance (GBP mn) Rs mn 3QFY14 3QFY13 YoY% 2QFY14 QoQ% Revenues 5,328 3, , Total expenditure 4,373 3, , RM consumed 3,296 2, , Employee cost Other expenses (net) EBITDA EBITDA margin (%) Depreciation Foreign exchange gain/(loss) Net Interest expense (16) (29) (44.8) 12 - PBT PBT margins (%) Tax Tax rate (%) Reported PAT PAT margins (%) Volumes (nos) 116,357 94, , Realization (GBP) 45,790 40, , Source: Company JLR revenues grew strongly by 40% YoY led by both volume growth and higher ASP's. Revenues for the quarter stood at GBP5,328mn, as against GBP3,804mn in 3QFY13. Volumes during the same period moved up by 23% and ASP's were higher by 14% led by improved product/geography mix. JLR's retail volumes during the quarter improved by 27% YoY to 113,000 units. Over 2QFY14, JLR reported 16% jump in revenues, aided by 14% higher volumes. Sequentially, ASP's improved by 1%. Improvement in product mix and geography mix helped the company in expansion of gross margins from 36.7% in 3QFY13 to 38.1% for the period under consideration. Over 2QFY14, gross margin witnessed 60bps increase. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 14

3 Employee cost and other expenses were up by 25% YoY at GBP440mn and GBP637mn respectively. However, as a % sales, both employee cost and other expenses witnessed decline as compared to 3QFY13. EBITDA grew by 79% YoY and 16% QoQ to GBP955mn. JLR's EBITDA margin witnessed a marked improvement from 14% in 3QFY13 to 17.9% in 3QFY14. Strong EBITDA margin came in after accounting for net negative forex impact of GBP116mn. EBITDA margin received support from rich product mix (Range Rover Sport, New Range Rover). During 2QFY14, JLR's EBITDA margin stood at 17.8% but that included annual benefit of local incentives to the tune of GBP79mn. Adjusted EBITDA margin for 2QFY14 stood at 16.1%. Depreciation increased by 31% YoY amid increased R&D activity and capex. Foreign exchange gain of GBP92mn includes mark to market of hedging instruments and revaluation of loans and other balance sheet items. Interest expenses include GBP23mn unrealised gain on bond call options and hence there is a net interest income of GBP16mn. 3QFY13 interest expense includes GBP39mn MTM gains of bond call options. Tax rate at 26.5% inched up QoQ, though the same was static YoY. JLR's 3QFY14 net profit came in at GBP619mn, as against net profit of GBP296mn and GBP507mn reported in 3QFY13 and 2QFY14 respectively. Going into 4QFY14, the product mix is expected to be rich but unfavorable foreign exchange movement could to a certain extent hurt margins. For the quarter, JLR generated free cash flow of GBP234mn and for 9MFY14 FCF generation stood at GBP323mn. In December 2013, JLR raised $700mn through bond at 4.125% due in Further, in January 2014, the company issued another GBP400mn bond at 5% due in Simultaneously, JLR has made a tender offer for GBP500mn 8.125% bonds due in 2018 and $410mn, 7.75% bonds due in Accordingly the company will be able to substitute high cost bonds with new lost cost bonds. Consolidated Result Consolidated Quarterly performance (Rs mn) Rs mn 3QFY14 3QFY13 YoY (%) 2QFY14 QoQ (%) Revenues 638, , , Total expenditure 539, , , RM consumed 399, , , Employee cost 58,503 43, , Other expenses 81,174 64, ,464 (3.9) EBITDA 99,485 56, , EBITDA margin (%) Depreciation 28,527 20, , Interest cost 10,012 9, ,117 (9.9) Other Income 1,575 1,886 (16.5) 2,321 (32.2) Exceptional/Extraordinary items (1,243) (1,735) (28.3) (2,738) (54.6) PBT 61,277 26, , PBT margins (%) Tax 13,086 10, , Tax rate (%) PAT (bef minority int/asso pft) 48,191 16, , Share of associates/minority Int (16.1) Reported PAT 48,048 16, , PAT margins (%) Reported EPS (Rs) Source:Company Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 15

4 On a consolidated basis, revenues grew by 39% YoY to Rs638,768mn, on the back of healthy sales growth from JLR. Despite negative EBITDA margin in the standalone business, JLR led consolidated EBITDA margin to improve from 12.3% in 3QFY13 and 15.2% in 2QFY14 to 15.6% for the quarter under consideration.net profit at the consolidated level came in at Rs48,048mn, higher by 165% YoY and 35% QoQ. Apart from robust JLR performance, net profit was also propelled by significant tax write-back at Indian operations. JLR's capex plans Company has recently increased its FY15 capex guidance from GBP 2.75 bn to GBP bn. Company will be investing almost equally in both - new products/technologies and capacity expansion. Capex plan is expected to stay in the range of 15-16% of sales in the next 2-3 years and will normalize to 10-12% of sales thereafter. JLR's capacity at the existing UK plants is expected to be 500,000 units annually by end FY15. China capacity of 130,000 (Phase 1) is expected to come on stream in 1QCY15. Company expects the full ramp-up in China capacity to happen over a period of 3 years. In Brazil, the company is setting up a new manufacturing unit, having annual capacity of 24,000 units and investment of GBP240mn. Company has already entered into an agreement with state authorities to open this new manufacturing facility by Company plans to have 30-35% capacity for producing Jaguar branded cras and the balance 60-65% for making cars under the Land Rover brand. Apart from this, the new engine plant, capable of manufacturing 2 litre engines is also expected to come by end CY2014. We recommend BUY on Tata Motors with a price target of Rs.423 Outlook and Valuations TAMO's India operations are expected to remain weak for some more time. Both CV and PC segment are under intense pressure and we see no immediate turnaround. In the commercial vehicle category, general weak economic factors continue to delay recovery. Fleet utilization rates are lower and freight rates remain sluggish. Revivial in CV industry fortunes will depend upon improved macro factors. In the passenger car segment, the company recently launched few new products in a bid to improve volumes and regain lost market share. While new launches from the company are a step in right direction, we believe more such initiatives are required before the company sees turnaround in the passenger car business. We thereby expect significant pick up in passenger vehicles volumes for the company only over the longer time frame. JLR is in midst of a strong product pipeline that includes new launches/upgrades/ facelifts planned over the next few years. Company is filling in gaps in its product portfolio and accordingly is increasing its reach. Rich product/geography mix is likely to provide support to the EBITDA margins. We have revised our FY14 and FY15 estimates. Given continued weakness in domestic operations, we have cut our estimates for the standalone operations. On the other hand, we raise our JLR estimates upwards to factor in expected robust performance. We upgrade the stock to BUY (earlier ACCUMULATE) with price target of Rs423 (earlier Rs415). Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 16

5 Change in estimates FY14 FY15 Rs mn Old New % chg Old New % chg Revenues 2,202,342 2,312, ,545,194 2,700, EBITDA margin (%) Net profit 134, , , ,957 (3.7) Source: Kotak Securities - Private Client Research Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 17