Edelweiss - Tata Motors, Bajaj Auto

Tata Motors's Q4FY07 results were marginally ahead of our expectations primarily on higher-than-expected other income. Net profit, without adjusting for foreign exchange gains, increased 28.4% Y-o-Y to INR 5.77 bn. The company booked a forex gain of INR 602 mn, on hedging its export receivables and translation of its outstanding FCCB issue. Adjusted for forex gains (considering hedging gains as operating income), EBITDA margins declined steeply by 145bps Q-o-Q to 11.3% in Q4FY07. We believe that Tata Motors faced margin pressures following slow down in CV sales and therefore, the sales mix had a higher proportion of passenger vehicles.

The basic demand drivers for CV sales i.e., freight generation from improved industrial activity and stable freight operator profitability rates, remain intact. However, in context of the recent rise in interest rates we are cautious on the volume growth outlook in the near term. Sales for the first quarter may decline by 6-8%. We continue to like the stock on back the of stable CV volume growth expectation for FY08, improved volume outlook for the car business on new model launches in the next few months, steady margins, and value in the balance sheet. The stock, at 11.6x FY08E and 10.2x FY09E consolidated earnings, looks attractive in relation to the rest of the automobile space. We reiterate 'BUY' recommendation.

Edelweiss - Tata Motors, Bajaj Auto

Bajaj Auto (BAL) announced its plan to demerge its financial assets from the automotive business, along with its Q4 and FY07 results. It also provided details of the arrangement it has with Allianz regarding transfer of its stake in the life and general insurance ventures.

Given that the options provide for Allianz to acquire Bajaj Auto's stake in the two joint ventures at a nominal price, the valuations assigned to these businesses need to be revised significantly downwards. We have valued these ventures considering an effective 26% stake in the life insurance venture and an effective 50% stake in the general insurance venture. On this basis, we estimate the value of Bajaj Auto's holdings in the life and general insurance businesses at INR 446 and INR 114 per share, respectively.

We believe the demerger structure is effectively value-neutral as a large chunk of the surplus funds will remain with the holding company and continue to be deployed in liquid investments (market value of INR 63 bn). The management intends to make these funds available to the two demerged companies (primarily the financial services business in our view) for their strategic needs, such as for pursuing large acquisitions or new business opportunities, on arm's length basis, as well as to pursue new businesses for the holding company. Till such time as the funds are put to productive use, the holding company will continue to attract a significant discount to its underlying value.

At current price, we believe the stock is fairly priced given the significant reduction in our estimate of the value of the company's insurance holdings. While we remain non-consensually positive on the outlook of the core business, both on volume and margin fronts, we are downgrading our recommendation on the stock to 'REDUCE' from 'BUY'. We will review our recommendation on a further decline in the price.

Edelweiss - Tata Motors, Bajaj Auto