Tata Motors Rallies After Credit Suisse Upgrades Stock To Outperform
Tata Motors is one of the top gainers on the Nifty50 index today, posting its biggest intra-day gain since September 6, 2016, after Credit Suisse upgraded the stock to Outperform.
The sharp depreciation in the British Pound (GBP), which in turn means greater revenue in Rupee terms from Tata Motors'subsidiary Jaguar, Land Rover has prompted the brokerage house to upgrade the stock from Neutral to Outperform. The target price has been increased from Rs 510 to Rs 720, which is a jump of 40 percent from Monday's closing price of Rs 506.35.
We believe the GBP depreciation will drive a multi-year outperformance for TTMT (JLR).Credit Suisse note
The brokerage report's authors, analysts Jatin Chawla and Vaibhav Jain say a 15 percent depreciation in the Pound can lead to a more than 50 percent rise in earnings before interest, taxes, depreciation and amortisation (EBITDA) per car. The Tata Motors stock has rallied only ~5 percent since the Brexit vote outcome, broadly in-line with other luxury carmakers, but underperforming its Indian counterparts. Jaguar Land Rover's (JLR) product mix, platform consolidation and soft commodity prices as some of the other key drivers, which can provide an upside of up to 300 basis points, says the report.
The brokerage house also expects JLR's margins to come in above 20 percent in the December quarter, which in turn will force an upgrade in earnings per share (EPS). The share of higher margin models is also expected to rise from the current 30 percent to 40 percent over the next two years, largely driven by the new Discovery and the mid-sized Range Rover in this calendar year.
Credit Suisse's Valuation Math/Share
Jaguar Land Rover: Rs 496 (4x EV/EBITDA)
Domestic Business: Rs 113
JLR's China JV: Rs 62
Other subsidiaries: Rs 48
Total: Target price of Rs 720
With higher earnings, valuation gap with BMW is now largely closed on FY19 EPS. With better margins and growth profile, FCF (free cash flow) would be higher, which will drive re-rating.Credit Suisse note.
JLR's Slovakia plant can offset any potential trade barriers in case of a hard Brexit and a weaker GBP can help make up for the slowdown in UK, says Credit Suisse. A faster adoption of electric vehicles (Tata Motors has none in its stable right now) and a sharp slowdown in the U.S. and Europe could be the only two risks for the carmaker, says the brokerage house.
Tata Motors is a Credit Suisse Asia ex-Japan Focus List stock.
Shares of Tata Motors were trading 4.76 percent higher at Rs 530.45 per share at 10.55AM.
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