Tata Motors
Cluster: Apple Green
Recommendation: Hold
Price target: Rs792
Current market price: Rs772
Recovery still away
Key points
- Tata Motors' sales for November 2007 stood at 46,947 vehicles. Total sales declined by 4.3% year on year (yoy) and 5% month on month (mom).
- Commercial vehicle (CV) sales in the domestic market for the month grew by 4% to 26,895 vehicles. The sales growth of CV segment continues to be driven by the sales of light commercial vehicles (LCVs), which grew by 10% yoy. Medium and heavy commercial vehicle (M&HCV) sales were flat at 14,426 vehicles and continue to be affected by high interest rates and high base of last year.
- Freight rates have started to pick up with the commencement of the festive season after remaining stagnant for last two months. Freight rates increased by 2% for the month and a further recovery is possible.
- Passenger vehicle segment performed badly in November with domestic sales declining by 16% to 16,322 vehicles. Passenger car sales for the month declined by 21%. Indica sales declined by 19.6% yoy to 10,488 units, while Indigo sales fell by 29.5% yoy to 2,014 vehicles. The substantial decline in passenger car sales in November 2007 was due to the high base month of November 2006. Passenger car sales were higher in November 2006 due to full supply after the restoration of the company's paint shop, which had got damaged in a fire in late September 2006. Sales of Sumo and Safari grew by 7% yoy to 3,820 units mainly driven by the sales of the recently launched Safari Dicor VTT, which recorded a 55% sales growth with 1,775 units.
- Export sales for the month declined by 1.7% yoy and 12% mom to 3,730 vehicles. Export sales as a percentage of total sales volume was down to 7.9%, the lowest in the year as compared with the highest of 12.4% in June 2007.
- We continue to take a very cautious outlook of CV industry considering the high base of last year, the lower availability of finance and the delinquencies in the sector. Some momentum has been witnessed in the segment with the beginning of the festive season, but high inventory in the system would restrict the growth in the current year. In the passenger vehicle segment the company will continue to lose market share due to lack of new product launches.
- The company's plans to acquire Jaguar and Land Rover is also a cause for concern, as these acquisitions would not be value accretive. The estimated acquisition price of $1.5 billion could strain the company's balance sheet in addition to its huge capital expenditure plan.
- At the current market price of Rs772, the stock discounts its FY2009E consolidated earnings by 12.2x and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.1x. We maintain our Hold recommendation on the stock with a price target of Rs792.
STOCK UPDATE
Oil drilling
Adding fuel to fire
It couldn’t have been better for oil drilling companies. The charter rates for drilling rigs are already at a record high level due to a favourable supply-demand scenario. In fact, the day rates have increased by as much as 200% to 300% (depending on the asset specification) over the past three years. For instance, an offshore rig (350-feet-jack-up rig) has been contracted at day rates of over $2,00,000, up from around $75,000-80,000 couple of years back.
Cement
ACC, Ambuja Cements sales up during November
The outlook for the cement sector is buoyant. Going forward we will witness rise in volumes as construction activity catches full steam in December and continues its momentum in the fourth quarter as well. Rising cement demand will push up the prices gradually. We have already seen the first such price hike, after the resumption of construction activity post monsoon, in Maharashtra and Andhra Pradesh. We see this trend to continue across other regions going forward. Price hike and higher volumes in the coming months will be a major trigger for the cement stocks.