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Tata Motors to race ahead on bourses riding JLR launches, better margins

Despite the unpleasant corporate battle between Ratan Tata and Cyrus Mistry , the Tata Motors stock has outperformed the benchmark indices by a wide margin last year.

, ET Bureau|
Updated: Jan 02, 2017, 08.01 AM IST
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JLR, Tata Motors' UK subsidiary, which contributes nearly 85% of Tata Motors' revenue, has a strong product pipeline for the next three years.
JLR, Tata Motors' UK subsidiary, which contributes nearly 85% of Tata Motors' revenue, has a strong product pipeline for the next three years.
ET Intelligence Group: Several portfolio managers are likely to bet on the Tata Motors' stock in 2017, thanks to a strong product pipeline of its UK subsidiary Jaguar Land Rover (JLR) and margin expansion plans, going ahead.

Despite the unpleasant corporate battle between Ratan Tata and Cyrus Mistry, the Tata Motors stock has outperformed the benchmark indices by a wide margin last year, and has given robust earnings visibility for the next two years as well.

There are a couple of reasons why it makes sense to place your faith in the stock in 2017.

JLR, Tata Motors' UK subsidiary, which contributes nearly 85% of Tata Motors' revenue, has a strong product pipeline for the next three years. (See chart for the entire product pipeline). This is expected to drive the mid-teen volume growth for JLR in the next three fiscals.



Analysts are expecting JLR to sell around 6.08 lakh and 6.84 lakh units for the current and the next fiscal year -a volume growth of between 11.5 and 12.5% YoY. Between April and November 2016, JLR's volume grew 17.5% to 3.69 lakh units, thanks to incremental volumes of F-Pace, a new vehicle launched at the beginning of 2016 under the Jaguar brand.

JLR will be having a major upgrade of the 'New Discovery' in the second half of the current fiscal. In the next fiscal, it is expected to launch the mid-sized Range Rover, Jaguar new crossover E-Pace, and upgrade the Range Rover Sport.

After the launch of I-pace, JLR's first electric vehicle, at the Los Angeles motor show in November 2016, the company has demonstrated it doesn't lag in developing electric vehicles. This development has come as a surprise amidst concerns that JLR has under-invested in the electric vehicle technology . I-pace is likely to be produced from the second half of FY19 commercially .

The second reason is that JLR's margins will have multiple levers of expansion. The biggest one is the benefit of pound's deprecation against the US dollar given that nearly 80% of sales is from outside the UK. The impact of pound depreciation has already been reflected in lifting the average price per vehicles from the third quarter of FY16, but the operating profit margin side it is yet to be reflected.

The company has several commodity hedges which have offset the favourable currency impact. However, the impact of commodity hedges is expected to moderate going ahead and help to lift its margins.

Some analysts believe that pound depreciation could have a similar effect as what yen depreciation had on Japanese auto stocks, post the yen depreciation. It must be noted that yen depreciation resulted in multi-year outperformance of Japanese auto stocks.

On the valuation front, the stock is trading at an attractive valuation of 7 times its FY19 projected earnings given the healthy outlook on JLR's volume and margins and more than 50% annualised earnings growth between FY17 and FY19.

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