Tata Motors is a BUY

BofA/Merrill raise consolidated earning per share (EPS) forecasts by 12-16%.

Second quarter recurring profit (earnings before interest and taxes) for the company at Rs 2,094 crore was ahead of our consensus expectation of Rs 2,010 crore thanks to Jaguar Land Rover,which saw sales rise 43% to Rs 1,650 crore against the estimate of Rs 1,220 crore even as standalone operations disappointed on cost pressures.

We raise our consolidated earning per share (EPS) forecasts by 12-16% over FY11-12E on revised margin assumptions of constituent businesses and our price objective by 16% to Rs 1,400 driven by upward revision of forecasts and expected rerating of JLR,still in line with global peers.

Net profit at £229 million was 35% ahead of estimates due to better realisations (up 7% qoq) leading to stronger earnings before interest,taxes,depreciation and amortisation (Ebitda) margins (up 110 basis points qoq at 16.6%).

Story continues below this ad

We expect margins to hold above 15% thanks to improving mix (premium products like Jaguar XJ,shift to China and/or the UK),thereby partially offseting impact of higher input cost and adverse exchange rate.

We raise profit forecasts by 32- 35% over FY11-12E,with volume assumptions of 2,40,000 and 2,60,000,respectively.

Ebitda margins at 9.7% (down 160 basis points qoq,370 basis points yoy) were impacted by higher input costs and increase in marketing expenses linked to Nano and other cars.

While cost pressures are unlikely to ease due to new emission norms,we expect partial mitigation through price hikes and better sales mix,that is ramp up of light vehicles production at Hardwar.

Story continues below this ad

We also cut margins and therefore profit forecasts by 13-18% over FY12E. We rate Tata Motors buy with a price objective of Rs 1,400.

Bank of America Merrill Lynch