In May we cut the fair value estimate, or FVE, to Rs 550 from Rs 650 per share. This was driven by revision of our midcycle margin forecast to 9% from 11% earlier. Nonetheless, we continue to find value in Tata Motors at the current share price level.
With a base-case FVE of Rs 550 per share….
We forecast compound annual revenue to increase 11% for Tata-branded vehicle operations and to grow about 5% (about 6% for GBP) annually for the JLR business, which results in an annual revenue growth rate of 7% for the consolidated operations across our 2015-19 forecast period. The 10% growth rate for our Tata India vehicle sales volume assumption includes 5% growth in fiscal 2016 volume on improving Indian economic conditions and further acceleration from there. This also infers an expected economic recovery in India.
Including the acquisition of JLR and the launch of the financial services subsidiary, consolidated revenue has grown at an annualized rate of 31% during the past 10 years. During the same time frame, Tata-only revenue has grown annually at a rate of 19.0%. Since the company was acquired in fiscal 2009, JLR annual revenue growth has been 36.7%.
We think India represents a growth opportunity for car manufacturers and, as such, we estimate that the new launches such as Bolt and Zest will boost the rate of Tata's annual volume increase to 7% at the end of our five-year forecast. After a 7% increase in volume last fiscal year, we estimate total JLR volume increases 6% this fiscal year, with the rate of increase tapering off to 5% at the end of our five-year forecast period.
Our base-case scenario also assumes a midcycle adjusted EBITDA margin of 14.6% at the end of our five-year forecast period. For fiscal 2016, we estimate EBITDA margin to decrease to 14% from 14.5% in the past fiscal year. The decrease is mainly as a result of the higher marketing expense on launch of new models. Historically, Tata Motors has generated EBITDA margins in excess of 12%, while JLR is currently producing EBITDA margins in excess of 17%. Since Tata's EBITDA margin is less than 5% for the last two years, as the Indian economy recovers, we think it's reasonable to estimate 15% consolidated EBITDA margin by the end of our five-year forecast.
Our bear-case FVE is Rs 340 per share.
Weaker demand could result from a worse-than-expected economic recovery in India and Europe. This, coupled with intense price competition to retain market share would lead to muted revenue growth. We have also built in higher cost of sales in this scenario because of the resulting inflationary pressure on raw material costs. This results in Tata and JLR annualized revenue growth of 6% and growth of 3%, respectively. We assume EBITDA margins fall to 13.6% in fiscal 2016 on higher variable marketing expense on launch of new models but then remains around 13.5% on poor cost absorption from weaker-than-expected volume.
Our bull-case FVE is Rs 710 per share.
This scenario is modeled around 9% average annual top-line expansion. Assuming Indian and European economies rebound more strongly, we estimate consolidated revenue jumping average 10% over fiscal 2015-17, tapering to a 8% growth rate in fiscal 2020. Tata and JLR average annualized revenue growth is assumed to be 12% and 8% (8% in British pound terms), respectively, across our five-year forecast period. We base the robust growth on Indian demand for passenger cars rapidly increasing combined with solid growth in JLR revenue from developing markets.
In this scenario, we estimate Tata's EBITDA margin increasing to 16.5% in fiscal 2020 from 14.5% in fiscal 2015, with Tata/JLR's capacity being fully and efficiently utilized. Margin expansion is partially offset by higher commodity costs, with worldwide demand rising for raw materials on more favorable global economies.
