TATA MOTORS DVR: PREFER OVER ITS EQUITY SHARES !!!

Scrip Code: 570001 / TATAMTRDVR

CMP:  Rs. 168.40; Buy at every dips.
Medium to Long term Target – Rs. 180; STOP LOSS – Rs. 154.92; Market Cap: Rs. 8,116.19 Cr; 52 Week High/Low: Rs. 189.90 / Rs. 116.10

Total Shares: 48,19,59,190 shares(17.79% of Share Capital); Promoters : 42,53,587 shares –0.88 %; Total Public holding : 47,77,05,603 shares – 99.12 %; Book Value: Rs. 60.65; Face Value: Rs. 2.00; EPS: Rs. 3.70; Dividend: 205 % ; P/E: 77.11 times; Ind. P/E: 35.99; EV/EBITDA: 21.37. Total Debt:  Rs. 1,970.97* Cr; Enterprise Value: Rs. 19,213.20* Cr.

*Being DVR a class of equity capital, Tata Motors financials are used.

TATA MOTORS LIMITED: Tata Motors was founded in 1945 as a Public Limited Liability Company under the Indian Companies Act VII of 1913 as Tata Locomotive and Engineering Company Ltd and changed its name to Tata Engineering and Locomotive Company Limited (TELCO) in 1960 and later on it again changed its name to Tata Motors Limited in 2003. The company is leading manufacturer of commercial & passenger vehicles in India and is among the top three passenger car manufacturers in India and world's fourth largest truck manufacturer and is also world's second largest bus manufacturer. Through its subsidiaries, the company is engaged in engineering and automotive solutions, construction equipment manufacturing, automotive vehicle components manufacturing and supply chain activities, machine tools & factory automation solutions. Tata Motors has operations in UK, South Korea, Thailand & Spain. The company has many subsidiaries but the most prominent among these is Jaguar-Land Rover (JLR- a popular brand of British car manufacturing company Ford Motors, Jaguar was bought at $238 Cr from General Motors in 1989 and Land Rover was bought from BMW for $300 Cr in the year 2000) which was acquired in 2008 by Tata Motors at $230 Cr ($60 Cr for JLR Pension fund + $170 Cr to Ford motors) and turned it from a loss making company to a profit making company. JLR contributes 54 % to the company’s revenues. The company’s product portfolio ranges from the ultra-low cost car Nano which was launched in 2011 to the luxurious cars from JLR, from its ground breaking invention of the light commercial vehicle (LCV) the Ace to the international Prima Truck range. Tata Motors is compared to Toyota Motors Corp of Japan, Mazda Motor Corporation of Japan, Suzuki Motor Corporation of Japan, Jardine Cycle & Carriage ltd of Singapore and Bayerische Motoren Werke AG (BMW), Audi AG, Daimler AG, Volkswagen AG of Germany, Ford Motors of USA and Mitsubishi Corporation.

Investment Rationale:

Range Rover Evoque 5 door

Tata Motors is India's largest automobile company and its most profitable subsidiary Jaguar & Land Rover recently launched the all-aluminium bodied new Range Rover which witnessed a huge response. This is the first major platform change for the product in 10 years. Given the fact that there was no platform change over the last decade & so there could be a good demand for the new Range Rover and the upcoming product launches on the new platform. In addition to the new Range Rover, JLR is likely to start the wholesale sales of the new Range Rover Sport by June’13. These two products, coupled with stable volumes from newly launched model Evoque are likely to lead to a 12.6% CAGR in volumes for Land Rover for FY12 to FY15E period. Jaguar has a very limited product range, with just three models - XF, XJ and XK - in the higher-priced segments. To increase its addressable markets, Jaguar has planned to have few new launches. At the same time XF and XJ with a 2 liter engine have been launched in China which is expected to lead to better pricing as it would attract lower consumption tax. Chinese market is driven by outright cash purchase (Cash & Carry) and the products are priced at 25-40% premium on account of strong demand for luxury brands this will also boost its revenue from China. In addition, Jaguar will launch a new F-type sports car by Q1FY14. JLR benefits when the GBP £ weakens against the Dollar $. As a result, 1% depreciation of GBP £ against USD $ improves its EBITDA margins by 0.50%. Similarly it benefits when GBP £ appreciates against EURO €. As a result, 1% appreciation in GBP £ against EURO € improves its EBITDA margins by 0.15-0.20%. JLR payables are 60% in GBP £ and 40% in Euro €. Given that JLR buys about 40% of its components from Europe & than it sells about 20% vehicles in that continent, hence JLR is a net importer of 20% in Euro € terms. As a result, it benefits when the GBP £ strengthens against the Euro €. Increase in addressable segments, forex fluctuations coupled with new products launches, would lead to a growth of about 20.0% CAGR in volumes over FY13-FY15E period for TATA MOTORS.

Outlook and Valuation:

Tata Motor’s new launches at JLR, including the all‐aluminium bodied Range Rover have generated huge positive response from the customers which shows it potential to command higher market share & so such high PE multiples. The long term investors can buy the Tata Motor DVR in view of attractive valuation. The long term holders of ordinary shares of Tata Motor can switch to Tata Motor DVR. The Tata MotorsDVR shares carry 1/10th of voting rights and shareholders are entitled to a 5% higher dividend than ordinary shares in lieu of surrendering their voting rights. Tata Motors DVR  currently trades at a discount of 40.96 %. The average discount for the DVR to Tata Motors ordinary share was 38.6 % since inception. The average discount for the DVR share over the last two years has been 39.3 %. At the Current Market Price of Rs. 168.40, the DVR is trading at a 40.96 % discount to Tata Motors’ ordinary share which is at Rs. 285.25. At the current levels, the probability of the discount narrowing is higher. On SOTP basis the valued of Tata motors comes at Rs. 281.60 and applying 40% discount to it gives DVR valuation at Rs. 169. One can buy Tata Motor DVR at all lower levels and on every dips for better returns. Globally DVRs trends to trade between 10 % - 15 % discounts to its Equity shares, TTM DVR currently trades at 40 % discount to its Equity shares. One should buy TTM DVR at 40 % - 45 % discount to its EQ SH & Sell when DVR arrives at  a 30-35% discount to its EQ SH. TTM DVR can be a good ‘BUY’ with a target price of Rs.180 for the medium to long term. Expect discount to the Equity shares reduce to at least 30 % over next one year given the attractive valuations and increasing free float. 

SOTP valuation (FY2013E)

BUSINESS SUBSIDIARY	Value per Share(₹)
Core Business	47.00
Jaguar Land Rover Plc (3.5x FY13E EV/EBITDA)	272.00
Tata Daewoo Commercial Vehicle Co. Ltd	3.00
Tata Motor Finance Ltd	4.00
Tata Technologies	2.00
Value of Other Subsidiaries	24.00
TOTAL VALUE	352.00
Less: 20 % Holding Company Discount	70.40
TOTAL VALUE PER SHARE	281.60

KEY FINANCIALS	FY12	FY13E	FY14E	FY15E
SALES (₹ Crs)	165654.50	184759.50	224919.20	258004.70
NET PROFIT (₹ Cr)	12,522.40	9,471.60	12,678.20	15,430.60
EPS (₹)	39.50	28.40	38.00	46.30
PE (x)	7.30	10.20	7.60	6.30
P/BV (x)	2.80	2.30	1.90	1.60
EV/EBITDA (x)	5.10	5.00	4.00	3.40
ROE (%)	47.90	25.30	27.30	27.5
ROCE (%)	21.60	13.30	15.20	16.40

I would buy TATA MOTORS DVR with a price target of ₹ 180 for Medium to Long term target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or ₹ 154.90 on every purchase. (Why Strict stop loss of 8 % ?) - Click Here

*As the author of this blog I disclose that I do hold TATA MOTORS DVR in my investment portfolio. 

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