Citigroup has maintained buy rating on Tata Motors with target price of Rs 1029. Research firm view recent weakness in stock price, as also the significant underperformance vs. Sensex as an enhanced opportunity to buy the stock from a 1-year perspective.

Recurring PAT declined 27% Y/Y

Reported PAT at Rs4.7 billion rose 22%Y/Y substantially above our estimates, with F/X gains of Rs2.06 billion being the key Variance excluding these, operating results (EBITDA) was 17% lower than our expectations as the EBITDA margin compressed 290 bps Y/Y on weaker product mix (MHCV sales declined 8%Y/Y), and continued input cost pressures (+220bps Y/Y).

Consolidated Results

We estimate consolidated recurring PAT declined 18% Y/Y parent's performance mitigated by the robust performance of key subsidiaries like Tata Daewoo and also Telcon (PAT up 55% and 113% Y/Y respectively). Consolidated margins declined 90bps Y/Y to 11.3%, implying significant margin expansion in the main subsidiaries.

Con Call Takeaways

In the post results call, management indicated: 1) MHCV sales were impacted to the extent of 2-3000 units ( 7% of sales ) due to shortfall in engine supply from Tata Cummins (production constraints hence resolved), 2) Volume pick up in MHCVs should occur into 2H (rather than 2Q as we were earlier expecting) as economic fundamentals remain strong, and interest rates have peaked, 3) Cost cutting initiatives on labor should be evident in 2Q, 4) Value unlocking will occur in the subsidiaries, without specifying a time frame.

Retain Buy (1L)

We view recent weakness in stock price, as also the significant underperformance vs. Sensex as an enhanced opportunity to buy the stock from a 1-year perspective. Key risks to our recommendation: 1) Multi year slowdown in CV sales, 2) Any significant inorganic initiatives.

Investment thesis

We have a Buy / Low Risk rating on Tata Motors, with our positive view reflecting a) the impending spinning off of the auto finance business (which will release substantial funds locked into the business and positively impact TTMT's return / asset turnover ratios and b) stronger-than-expected growth in heavy trucks as the ban on overloading continues to be implemented (not as effectively as we would like, but far better than we had initially envisaged). Key reasons for a strong growth outlook in commercial vehicles include a sustained pick-up in economic activity, a focus on infrastructure spending (expected to continue with funding in place) and a strong replacement cycle (27% of the existing fleet in India is more than 15 years old and needs to be replaced both for commercial and environmental reasons). Tata Motors should also benefit from the launch of new products and international initiatives, given a competitive cost structure.

Valuation

Our 12-month target price of Rs 1,029 is based on a sum-of-parts valuation methodology, which we believes captures the value embedded in subsidiaries and group holdings. Management has indicated its intent to unlock value, (to the benefit of Tamo's existing shareholders), for either / both HV Transmissions Ltd. and HV Axles Ltd., through an IPO or strategic sale to outside parties. We value Tata Motors' core business at Rs 827 per share, which is based on 9.2x FY08E EBITDA, at the lower end of the recent trading band, and which should be comfortably supported by a 25% CAGR in EBITDA over FY06-08E. Over the past fiscal, the EV / EBITDA multiple has ranged between 6.2-11.4x. We value the subsidiaries at Rs 201 per share.