Tata Motors Q2FY15: Buy at CMP and add on dips

Highlights:

- Consolidated operating income (net of excise) came in at Rs.60,564 crores for the quarter ended September 30, 2014, a growth of 6.5% over Rs.56,867crores for the corresponding quarter last year, despite continuing weak operating environment in the standalone business which was more than offset by, increase in wholesale volumes, richer product mix and market mix at Jaguar Land Rover (JLR).

- The Consolidated Profit before tax for the quarter was Rs.5,671 crores, a growth of 19.2% over Rs.4,756 crores for the corresponding quarter last year. The Consolidated Profit after tax (post minority interest and profit / loss in respect of associate companies) for the quarter was Rs.3,291 crores, a de-growth of 7.1% over Rs.3,542 crores for the corresponding quarter last year.

- In the standalone business, the revenues (net of excise) for the quarter ended September 30, 2014 stood at Rs.8,750 crores, as compared to Rs.8,868 crores for the corresponding quarter last year. Loss before and after tax for the quarter ended September 30, 2014 was Rs.1,107 crores and Rs.1,846 crores, respectively, against Rs.984 crores and Rs.804 crores, respectively, for the corresponding quarter last year.

Conclusion and Recommendation: TML’s standalone business continues to report weaker performance and the volume de-growth continues to remain high. M&HCV segment has shown some signs of recovery on the back of improving economic sentiment and strong replacement demand. The recent October month sales figures has shown a sharp rise of around 49% in the sales of Passenger vehicle segment on the back of demand arising from the newly launched Zest. Even though the management is saying that it is getting good responses from the public it is still too early to take a call on the products success. Zest is the first passenger vehicle from Tata Motors launched after four years and the first to be launched under TML’s new strategy to turnaround the company’s weak domestic business. Competition is very tough in this compact entry sedan segment and Zest has to fight against the popular Honda Amaze, the Hyundai Xcent and Swift Dzire.

We feel that the stock could be bought at the CMP and added on dips to Rs.456-475 (6.25-6.50x FY16E EPS) band for a target of Rs.602 (8.25x FY16E EPS) over the next quarter.