The following is the Stock Analyst Note, published by Morningstar Analyst Manish Vaswani on Tata Motors. Registered Morningstar Members gain exclusive access to our full Tata Motors Stock Analyst Report (PDF), including fair value estimates, consider buying/selling prices, bull and bear breakdowns, and risk analyses. Not a Registered member? Get these reports immediately when you sign up with Morningstar for free.
Tata Motors reported weak third-quarter results due to a combination of a net loss in its domestic operations and reduced profits at its Jaguar Land Rover business.
However, better results for the first nine months of fiscal 2013 compared with the same period last year, driven by higher JLR sales, support our thesis that investors will benefit from the success of Tata's JLR operations.
We have made modest upward revisions to our JLR revenue forecasts and downward revisions to our Tata domestic revenue forecasts for full-year fiscal 2013, which, coupled with an increase in valuation due to time value of money, result in a revised higher fair value estimate of INR 314.
Third-quarter revenue increased a meager 2% year over year due to a 2% increase in JLR revenue, which more than offset the more than 20% decline in Tata Motors' domestic revenue. Range Rover Evoque and Freelander volume, combined with continued healthy demand in China and other developing markets, led to 10% volume growth for the firm's JLR operations.
For the domestic operations, commercial vehicle segment volumes grew 6% led by 34% growth in light commercial vehicles, which offset a 40% decline in the medium and heavy commercial vehicles segment. Tata's domestic passenger vehicle business suffered a similar descent of about 36% largely due to greater demand for Maruti and Mahindra products, which were up 26% and 18%, respectively.
Tata's third-quarter operating margin decreased by 250 basis points to below 9%, and net income declined 52% to INR 16.3 billion, leading to EPS of INR 5.09 compared with INR 10.72 a year ago.
For the first nine months of fiscal 2013, Tata's domestic vehicle unit volumes have dropped by 2%, leading to a 10% decrease in net revenue for the India operations. However, JLR's unit volumes have risen over 18%, leading to a 15% increase in JLR revenue and resulting in an overall 16% increase in consolidated revenue to INR 1,328 billion.
However, consolidated operating margin has declined by over 50 basis points to 9% largely due to product mix and higher marketing costs.
Going forward, we believe margins will remain under pressure and we expect Tata Motors to deliver full-year fiscal 2013 operating margin of 8.6%, leading to our EPS estimate of INR 28.
