TATA MOTORS LIMITED

RESEARCH
EQUITY RESEARCH December 04, 2008

RESULTS REVIEW Tata Motors Sell

Losing ground
Share Data
Market Cap Rs. 58.2 bn Tata Motors Limited (TML)’s sales volume has been declining continually
Price Rs. 150.90 over the past few quarters. While the October sales volume registered a dip
BSE Sensex 9,229.75
of 19.8% yoy, despite being a festive season, the November sales volume
Reuters TAMO.BO
Bloomberg TTMT IN plummeted 29.3% yoy. We expect this trend to continue in the coming
Avg. Volume (52 Week) 0.3 mn quarters, given the slowdown in the economy, the cautious lending
52-Week High/Low Rs. 816/122
environment, and a significant decline in consumer spending. The
Shares Outstanding 385.6 mn
Company’s ageing portfolio, meanwhile, is adding to its woes. In such a
Valuation Ratios (Consolidated) scenario, the launch of Tata Nano by February 2009 is likely to provide
Year to 31 March 2009E 2010E
EPS (Rs.) 26.2 24.7
some cushion against the decline in volumes.
+/- (%) (48.6)% (5.8)% Currently, the biggest challenge for TML is to turn around its Jaguar Land
PER (x) 5.8x 6.1x
EV/ Sales (x) 0.2x 0.2x
Rover (JLR) business, for which it raised a bridge loan of USD 3 bn. In
EV/ EBITDA (x) 2.4x 2.2x order to partly re-finance the loan, TML offered a rights issue of its shares in
September 2008; however, the issue received a lukewarm response
Shareholding Pattern (%)
Promoter 33
because of the slowdown in the capital markets. Given the tight liquidity
FIIs 15 scenario and bleak capital markets, TML is likely to roll over its bridge loan,
Institutions 18
thereby adding to the Company’s finance cost. Further, JLR’s sales volume
Public & Others 34
is trending downwards, and given the current economic conditions in the US
Relative Performance and Europe, we do not expect volumes to recover in the near term. Thus,

1,100 we expect TML’s performance to remain under pressure in the near term.
950
800 We have valued the Company by using the DCF technique, assuming a
650
500 WACC of 11.8% and a terminal growth of 5%. Our valuation suggest a
350
200 target price of Rs. 125, which translates into a potential downside of 17.2%
50
Dec-07
Jan-08
Feb-08

Apr-08
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Aug-08
Sep-08
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Dec-08
Mar-08

from the current market price. Based on the Company’s bleak outlook and
our valuation, we have downgraded our rating from Hold to Sell.
TTMT Rebased BSE Index Key Figures (Standalone)
Quarterly Data Q2'08 Q1'09 Q2'09 YoY% QoQ%
(Figures in Rs. mn, except per share data)
Net Sales 65,946 69,284 70,293 6.6% 1.5%
Adj. EBITDA 7,760 5,225 5,649 (27.2)% 8.1%
Adj. Net Profit 5,007 4,076 6,232 24.5% 52.9%
Margins(%)
EBITDA 11.6% 7.5% 8.0%
NPM 7.5% 5.9% 8.8%
Per Share Data (Rs.)
Adj. EPS 11.8 9.6 14.7 24.2% 52.9%
Please see the end of the report for disclaimer and disclosures. -1-
 TATA MOTORS LIMITED
RESEARCH
EQUITY RESEARCH December 04, 2008

Result Highlights (Standalone)

During Q2’09, TML’s net sales increased 6.6% yoy to Rs. 70.3 bn, led by a
higher net realisation of Rs. 520,548 per unit, compared with Rs. 482,862
per unit in Q2’08. However, the increase in net sales was restricted by a
marginal fall in the sales volume (down 1.1% to 135,037 units). The fall in
the sales volume was a result of the downside witnessed in the Passenger
Vehicle (PV) and Exports segments, even though the Commercial Vehicle
(CV) segment reported a 4.4% yoy increase.
Quarterly Data Q2'08 Q2'09 YoY%
The slowdown in the Indian economy, unavailability of finance, and the
Domestic
M&HCV 35,966 32,993 (8.3)%
decline in consumer spending pressurised the sales volume in the PV
LCV 35,146 41,244 17.4% segment. In addition, the Company’s aging product portfolio dented the PV
Total CV 71,112 74,237 4.4%
sales volume. Furthermore, the global economic slowdown dragged down
Small 33,869 23,883 (29.5)%
Mid-Size 7,111 13,635 91.7% TML’s export sales volume. However, TML’s CV segment, primarily the
UV 9,658 9,318 (3.5)%
Light Commercial Vehicle (LCV) segment, restricted the fall in the overall
Fiat 980 1,034 5.5%
Total PV 51,618 47,870 (7.3)% sales volume by reporting an impressive 17.4% yoy increase, driven by the
Total Domestic 122,730 122,107 (0.5)% success of Ace Magic and Winger.

Exports 13,843 12,930 (6.6)% EBITDA decreased 27.2% yoy to Rs. 5.6 bn and the margin declined
365 bps to 8% in Q2’09. The fall in the EBITDA margin was driven by higher
Total 136,573 135,037 (1.1)%
raw material costs, primarily due to the unprecedented increase witnessed
in steel prices. Though we expect raw material costs to decline in the
coming quarters due to the recent downturn in the commodity cycle,
margins will remain under pressure as TML is likely to pass on the cost
benefit to the consumers. Notwithstanding the decrease in the EBITDA, adj.
net profit surged 24.5% yoy to Rs. 6.2 bn, and the net profit margin
expanded 130 bps to 8.8%. The increase in the net profit margin was due to
a lower effective tax rate.

Snapshot of the subsidiaries and JLR performance

Jaguar Land Rover’s sales volume

Quarterly Data Q2'08 Q2'09 YoY%

Jaguar 14,925 17,535 17.5%

Land Rover 54,264 43,886 (19.1)%

Total 69,189 61,421 (11.2)%

Please see the end of the report for disclaimer and disclosures. -2-
 TATA MOTORS LIMITED
RESEARCH
EQUITY RESEARCH December 04, 2008

Subsidiary performance for the quarter

Subsidiary Q2'09 YoY% Q2'09 YoY%
(figures in Rs. mn) Turnover growth PAT growth

Tata Daewoo 7,825.2 12% 222.6 (45.7)%

Telecon 7,643.4 9.8% 418.1 (48.6)%

Tata Technologies 3,239.6 24.8% 153.4 99.7%

Tata Motor Finance 1,997.7 (15.6)% (124.5) (135.5)%

HV Transmissions 383.8 (9.1)% 37.7 (60.6)%

HV Axles Limited 417.0 (4.1)% 42.4 (66.5)%

During the quarter, the performance of the TML’s subsidiaries was

adversely affected by the global economic slowdown. Barring Tata
Technologies, all subsidiaries witnessed a fall in profit after tax (PAT). The
performance of Tata Technologies was driven by the continued focus on
large deals, increased focus on offshore projects, and increased tax
efficiencies. Volumes of JLR contracted 11.2% yoy, partially offset by higher
sales of Jaguar due to the continued success of its new model Jaguar XF.

Key events

• The Company shifted the base of its Nano plant from Singur, West
Bengal, to Sanand, Gujarat. Meanwhile, the Gujarat government offered
a loan of Rs. 95.7 bn to Tata Motors for the Nano project, with a soft
0.1% simple rate of interest.
• In order to avoid the unnecessary inventory build-up amid the scenario
of declining demand, the Company shut down production for three-five
days across all its plants.

Outlook

TML’s sales volume has been trending downwards over the past few
quarters. While its October sales volume decreased 19.8% yoy, despite
being a festive season, the sales volume in November tumbled 29.3%. We
expect this declining trend to continue in the coming quarters, given the
cautious lending policy adopted by the banks, the decline in consumer
spending, and the slowing economy. Though the Nano’s launch has been
Please see the end of the report for disclaimer and disclosures. -3-
 TATA MOTORS LIMITED
RESEARCH
EQUITY RESEARCH December 04, 2008

TML cut production at its
Jamshedpur and Pune plants to
adjust to the slowdown
postponed because of the Singur imbroglio, it will help restrict the fall in
volumes.
To add to the Company’s woes is its JLR business, for which it raised a
USD 3 bn bridge loan. In order to partly finance its bridge loan, TML offered
a rights issue of Tata Motors in September 2008; however, it received a
lukewarm response, given the slowdown in the capital markets. Thus, we
believe that the Company would have to get its bridge loan refinanced;
raising a fresh loan or seeking finance from the capital markets would be
difficult because of the global liquidity crisis. Thus, the Company’s finance
cost will continue to pressurise its profitability. Further, JLR’s sales volume
is on a declining trend, and given the current economic conditions in the US
and Europe, we do not expect the sales volume to recover soon. Therefore,
we expect the Company’s performance to remain under pressure in the
upcoming quarters.
The global rating agency Moody's has lowered TML’s corporate family
rating from Ba2 to B1 because of a reduction in demand in both the
domestic and international markets. The Company is now in the 'non-
investment grade', with little assurance of long-term payments.
At the CMP, the stock trades at a forward P/E of 5.8x and 6.1x on its FY09E
and FY10E earnings, respectively. We have valued the Company by using
the DCF valuation, assuming a WACC of 11.8% and a terminal growth of
5%. Our valuation suggests a target price of Rs. 125, which translates into a
potential downside of 17.2% over the CMP. Hence, we have downgraded
our rating from Hold to Sell.

Key Figures (Consolidated excluding JLR)

Year to March FY06 FY07 FY08 FY09E FY10E CAGR (%)
(Figures in Rs. mn, except per share data) (FY08-10E)

Net Sales 237,695 323,612 356,515 291,644 273,870 (12.4)%

Adj. EBITDA 29,765 40,289 42,063 20,761 22,844 (26.3)%

Adj. Net Profit 17,196 21,700 20,698 12,263 13,130 (20.4)%

Margins(%)

EBITDA 12.5% 12.4% 11.8% 7.1% 8.3%

NPM 7.2% 6.7% 5.8% 4.2% 4.8%

Per Share Data (Rs.)

Adj. EPS 42.9 53.5 50.9 26.2 24.7 (30.4)%
PER (x) 20.4x 15.3x 3.0x 5.8x 6.1x
Please see the end of the report for disclaimer and disclosures. -4-
 TATA MOTORS LIMITED
RESEARCH
EQUITY RESEARCH December 04, 2008

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