Operating results below estimates: Tata Motors 2QFY2016 results have come in
below our estimates on the operating front. Consolidated revenues grew
marginally by 1% yoy to Rs61,318cr (coming slightly ahead of our estimates of
Rs57,484cr). Growth was subdued, mainly due to flattish top-line at JLR. JLRs
volumes grew a healthy 12% yoy during the quarter but an adverse product
(higher sales of relatively lower priced cars in the companys product portfolio)
and regional mix (lower China sales) led to lower realization, thus dragging the
top-line. The consolidated operating margin at 11.2% was below our estimate of
13.4%. JLRs EBIDTA margin at 12.2% was significantly below our estimate of
15%. JLRs margins were impacted by lower China sales, adverse product mix
and higher launch expenses. During the quarter, Tata Motors reported a loss at
the net level due to a one-off charge of Rs2,493cr related to damage caused by fire
explosions caused at the China port location, which affected JLR vehicles. However,
Tata Motors had a tax credit to the tune of Rs704cr which resulted in the Adj profit
coming in at Rs2,223cr for the quarter (better than our estimate of Rs2,041cr).
Outlook and valuation: JLRs volumes are likely to recover from 2HFY2016 on
back of new product introductions, tapping of new segments, and production
ramp up at the China JV. We expect JLRs volumes to grow at 13% CAGR over the
FY2015-2017 period. JLR aims to widen its presence across product segments
and is poised to become a stronger luxury car player in the next four to five years.
Also, the standalone business is expected to turn profitable at the operating level
in FY2016 on back of pick up in the commercial as well as passenger vehicle
segments and with gradual reduction in discounts. However, JLR margins are
likely to remain under pressure as the company enters new segments which would
lead to direct competition with established luxury players viz BMW, Audi and
Mercedes. We expect JLR margins to be in 14-15% range as against 18% range
in the last two years. Also, the stock currently trades at 28.9x its FY2016 and
14.9x its FY2017 adjusted earnings respectively, leaving limited scope of upside
from current levels. Thus, we have a Neutral view on the stock.

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