Tata Motors has been in the news of late for several reasons. The market has taken news on it its debt restructuring plan and granularity of Jaguar Land Rover sales data for February in its stride, even though earnings have been cut marginally for FY16 and FY17.
On Wednesday, the board cleared a rights issue of Rs 7,500 crore and buyback of non-convertible debentures, which the Street believes will impact the company positively. Even though equity dilution will impact the company's earnings, the funds will help retire debt and fund capital expenditure.
The debt reduction plan of the company through equity dilution has been received well by the market even though it would dilute earnings per share (EPS) by 4%. The company is planning garner about Rs 7500 crore from the rights issue, which will result in an equity dilution of about 5.1%.
Even though the equity dilution is marginally higher than what some analysts expected, it is not enough to change the rating of the stock. Morningstar says though the dilution is higher than their estimates, it is not materially significant to cause any change in the fair value estimate of Rs 700/share.
The Street remains optimistic for two key reasons. First, valuations are very attractive as the stock is trading at a price/earnings multiple of 8x its (FY16 earnings) and 6.8x (FY17 earnings). Analysts claim the stock is trading at a discount to its fair value.
Secondly, some analysts believe that JLR's volume growth will normalise from the June quarter. The company reported a 1.2% decline in Jaguar Land Rover (JLR)'s wholesale volume (38,541 units) for the month of February, which makes some analysts believe that volume recovery has been delayed.
Jaguar Land Rover volumes have been a cause of some concern but analysts believe most of it is due to shift in production of some lines to China. While some of it is to do with capacity constraints, a 20% decline in China has increased the risk to volumes in FY16. Fiscal year-to-date, Land Rover's volumes have grown by 10.5%, while that of Jaguar's declined by 4.2%, taking the overall volume growth down to 8%.
Motilal Oswal Securities believes JLR's volumes have been impacted due to several transitory events like the brownfield capacity expansion at Solihull, captive engine plant and China Chery joint venture plant, which resulted in gradual transition of manufacturing of select products from UK to China. The brokerage has cut earnings estimates for FY15/FY16/FY17 by 14%/8.5%/6% to factor in delayed recovery in volumes.
What gives comfort is the recovery in commercial vehicle volumes in India since August. Tata Motors is also planning to launch SUVs in India later this year. Religare Institutional Equities is building in a 17% CAGR in CV volumes for Tata Motors over FY15-FY17, and net profit of 31% for the company over this period.
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