INDIA DAILY May 31, 2016 India 30-May 1-day 1-mo 3-mo Sensex 26,726 0.3 4.4 16.2 Nifty 8,179 0.3 4.2 17.1 Contents Global/Regional indices Dow Jones 17,873 0.3 0.6 8.2 Daily Alerts Nasdaq Composite 4,934 0.6 3.3 8.2 Results FTSE 6,271 0.1 0.5 2.8 Tata Motors: JLR margin improves due to currency benefits Nikkei 17,056 (0.1) 2.3 6.4 Hang Seng 20,617 (0.1) (2.1) 7.9 NTPC: Strong capacity pipeline to drive growth KOSPI 1,969 0.1 (1.3) 2.7 Value traded – India Mahindra & Mahindra: Trudging along Cash (NSE+BSE) 194 194 202 Tata Communications: In-line quarter. Risk-reward continues to be favorable; Derivatives (NSE) 1,620 2,241 3,857 ADD Deri. open interest 1,977 1,813 1,791 Prestige Estates Projects: 4QFY16: will residential consolidation continue in FY2017 as well? Forex/money market Change, basis points Jubilant Foodworks: Still waiting for Godot 30-May 1-day 1-mo 3-mo PC Jeweller: Quarter print impacted by jewelry industry strike Rs/US$ 67.2 (0) 82 (100) 10yr govt bond, % 7.8 3 (1) (32) Karur Vysya Bank: Relatively better Net investment (US$ mn) 27-May MTD CYTD PVR: Good show FIIs 98 325 2,124 MFs 65 824 1,223 Top movers Change, % Best performers 30-May 1-day 1-mo 3-mo HDIL IN Equity 98.3 (0.4) 14.1 60.0 MMFS IN Equity 327.8 0.9 9.3 59.0 UPLL IN Equity 591.8 (0.6) 10.0 55.1 CRG IN Equity 68.0 13.1 18.0 51.4 VEDL IN Equity 106.5 3.6 2.6 50.8 Worst performers JPA IN Equity 5.7 (0.9) (24.7) (19.9) LPC IN Equity 1467.9 (0.8) (8.7) (16.3) UBBL IN Equity 717.3 (0.7) (5.9) (10.7) HCLT IN Equity 747.6 (1.3) (0.4) (8.1) CIPLA IN Equity 473.6 0.0 (11.8) (7.9) For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. BUY Tata Motors (TTMT) Automobiles MAY 31, 2016 RESULT Coverage view: Attractive JLR margin improves due to currency benefits. Consolidated EBITDA grew by 35% Price (`): 421 yoy in 4QFY16 which was 10% better than our estimates. Both JLR and standalone Target price (`): 550 businesses reported better than expected operational performance. JLR reported BSE-30: 26,726 adjusted EBITDA margin of 16.2% versus our expectation of 14.8% driven by currency benefits which boosted average selling prices during the quarter. JLR’s volume momentum is likely to continue in FY2017 which would help maintain strong EBITDA margin and cash flow. Maintain BUY with a revised TP of ₹550 (from ₹500 earlier). Company data and valuation summary Tata Motors Stock data Forecasts/Valuations 2016 2017E 2018E 52-week range (Rs) (high,low) 483-266 EPS (Rs) 32.5 47.6 56.7 Market Cap. (Rs bn) 1,359.3 EPS growth (%) (22.2) 46.5 19.2 Shareholding pattern (%) P/E (X) 13.0 8.9 7.4 Promoters 33.0 Sales (Rs bn) 2,755.6 2,996.3 3,308.5 FIIs 23.6 Net profits (Rs bn) 110.2 161.5 192.5 MFs 4.7 EBITDA (Rs bn) 367.6 445.2 507.6 Price performance (%) 1M 3M 12M EV/EBITDA (X) 4.2 3.6 3.1 Absolute 3.2 40.6 (12.5) ROE (%) 16.1 18.2 18.1 Rel. to BSE-30 (1.2) 21.0 (8.9) Div. Yield (%) 0.0 0.0 0.0 JLR business: Currency benefits positively impact EBITDA margin JLR reported revenues of GBP6.6 bn (+13% yoy) which was 5% above our estimates largely due to favorable currency movements as geographical mix was largely flat on a sequential basis. GBP depreciated by 6% qoq against USD and 3% against CNY in 4QFY16 which boosted average realizations. Excluding one-off items of GBP166 mn related to vehicle recall in the US due to faulty airbag and bad debt provisions, the company reported EBITDA of GBP 1.07bn (+5% yoy) which was 15% above our estimates largely due to better realizations. Other expenses also included forex loss of GBP145 mn related to FX/commodity hedges and revaluation of current assets/liabilities. JLR’s share of income in China JV increased to GBP49 mn in 4QFY16, a sharp jump from GBP22 mn in 3QFY16. JLR also reported a positive free cash flow of GBP1.4 bn in 4QFY16, largely due to GBP1.1 bn reduction in working capital requirements. This helped the company turn net cash at the consolidated level excluding financing debt. Standalone business reports a profit after 13 quarters The standalone business reported a profit of ₹4.65 bn in 4QFY16 helped by sharp improvement at the EBITDA level and a tax credit of ₹953 mn. Standalone revenues improved by 17% yoy driven by strong recovery in commercial vehicle volumes while the EBITDA grew by 4.6X on a yoy basis. Standalone operations turned profitable after posting losses for the past 13 quarters and will likely fund the capex through internal accruals in FY2017. Strong demand for new models of JLR and strong balance sheet to drive re-rating of the stock We estimate JLR volumes to grow in mid-teens in FY2017 led by strong demand of Jaguar XE, Hitesh Goel F-pace and Discovery Sport. At current currency spot rates, JLR is maintaining an EBITDA margin of ~17.5% despite an increase in fixed and variable marketing incentives. We are cautious in our EBITDA margin forecasts as it can fluctuate on currency movements and geographical mix, Nishit Jalan but we reckon ~16% EBITDA margin is sustainable in FY2017. The full benefit of currency and decline in commodity cost is yet to flow through in the P&L. We raise our consolidated EPS estimates by 6-14% over FY2017/18 driven by 70-90 bps increase in JLR’s EBITDA margin assumptions. We thus raise target price to ₹550 (from ₹500 earlier) based on SOTP methodology. For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Tata Motors Automobiles JLR margin improvement surprises the street JLR reported revenues of GBP6.6 bn (+13% yoy) which was 5% above our estimates largely due to favorable currency movements as geographical mix was largely flat on a sequential basis. GBP depreciated by 6% qoq against USD and 3% against CNY in 4QFY16. Excluding one-off items of GBP166 mn (see details below), the company reported EBITDA of GBP 1.07bn (+5% yoy) which was 15% above our estimates largely due to better realizations. Gross margin improved by 240bps qoq as against our estimate of 150bps improvement. Other expenses in 4QFY16 included one-off items amounting to GBP166 mn pertaining to vehicle recall in the U.S. potentially faulty passenger airbags supplied by Takata, doubtful debts and previously capitalized investments. Adjusted for these expenses, EBITDA margin for the quarter was 16.2%. The company also reported a forex loss of GBP145 mn above EBITDA pertaining to (1) GBP75 mn on realized forex hedges, (2) GBP20 mn on realized commodity hedges and (3) GBP50 mn loss on revaluation of current assets and liabilities. The profitability of the China JV improved further with JLR’s share of profit at GBP49 mn in 4QFY16 as compared to GBP22 mn in 3QFY16 and loss of GBP10 mn in 4QFY15. Adjusted PAT came in at GBP459 (down 2% yoy) mn which was 12% ahead of our estimates. Key highlights of JLR performance in 4QFY16 JLR’s wholesale volumes were up 26% yoy in 4QFY16 including sales in China joint venture. JLR’s volumes excluding China were up 20% yoy in 4QFY16 led by the strong success of Jaguar XE and Discovery Sport. Land Rover Discovery and Evoque volumes also grew in double-digits in this quarter. Range Rover volumes declined by 16% yoy and Range Rover Sport volumes were flat yoy. On the geographical front, China volumes (including China JV) increased by 55% yoy in 4QFY16. In the UK P&L, China volumes were up 14% yoy. Volumes in the developed markets (UK, Europe and North America) were strong with 17-52% yoy growth. China JV volumes came in at 12,500 units; largely flat qoq but up significantly from 4,000 units in 4QFY15. The profitability of the China JV improved further with JLR’s share of profit at GBP49 mn in 4QFY16 as compared to GBP22 mn in 3QFY16 and loss of GBP10 mn in 4QFY15 JLR has a strong product pipeline over the next few months with planned launches of Jaguar XE in the US, the all new Jaguar XF and F-Pace. This should help the company sustain strong volume growth in FY2017E. JLR reported a positive free cash flow of GBP1.4 bn in 4QFY16 largely due to GBP1.1 bn reduction in working capital requirements. Total R&D spend was GBP400 mn and capex spend GBP342 mn in 4QFY16. For FY2016, total capex + R&D was GBP3.14 bn. The company is indicating a total capex of GBP3.75 bn in FY2017E. Its capex spending has been much lower than its guidance historically. KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Automobiles Tata Motors Exhibit 1: JLR’s 4QFY16 results were above expectations on higher realizations; adjusted EBITDA margin at 16.2% JLR interim financial results, March fiscal year-ends (GBP mn) (% chg.) 4QFY16 4QFY16E 4QFY15 3QFY16 4QFY16E 4QFY15 3QFY16 FY2016 FY2015 Yoy chg.