Tata Motors

Company Update
DVR - Waiting for acceptance

April 18, 2011

¾ TML’s DVR is trading at attractive valuations of FY12E
Reco Previous Reco PER/EV-EBIDTA of 4.1x/3.3x, offers ~9% div. yield (over 15
Buy Buy months) and trades at a disc. of 44% to the ordinary share
CMP (Ord / D VR) Target Price (Ord)
¾ Barring Korean companies, the 44% discount for TML’s DVR
Rs1,233 / Rs 688 Rs1,520
is on the higher side when compared to the DVR of other
Price Performance (Ordinary) companies across geographies, market cap and sectors
(%) 1M 3M 6M 12M
Absolute 6 (0) 7 59 ¾ While an increase in free float of DVR reduces the discount
Rel. to Nifty 0 (1) 11 44 (recent case being Volkswagen), in the case of TML, the
Price Performance (DVR) discount has actually widened
1M 3M 6M 12M
(%) ¾ Expect discount to reduce (to atleast 30%) over the next one
Absolute 9 (5) (9) 26
year given the attractive valuations and increasing free float.
Rel. to Nifty 1 (7) (6) 14
Maintain BUY on Tata Motors, with a preference for DVR
Source: Bloomberg

Nifty and DVR (Dis/Prem) movement Tata Motors DVR is superior as they offer voting rights
100% 7000
We analyzed the DVR of companies across geographies, market capitalization and
80% 6000

60%
5000
sectors to understand the relationship between DVR and ordinary shares. We have
40%
4000 highlighted details of select companies, which we feel are quite similar to Tata Motors
20%

0%
3000
(with respect to DVR structure). As can be seen from the table below, TML’s DVR is
2000
-20%
superior as they offer voting rights which is not the case with many DVR. It also offers
-40% 1000

-60% 0 Re 0.50 higher dividends.

Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11

Tata Motors DVR - Disc/Prem Nifty

Brief about companies
Source: Bloomberg
Company Mkt Cap Country Voting Rights per share Extra dividend Business Interest
Stock Details (USD bn) Ordinary DVR
Sector Automobiles BMW 53 Germany 1 No Euro 0.02 Automobile
Bloomberg TTMT@IN / TTMT/A@IN Bombardier 13 Canada 10 1 $0.001563 Aircraft and train mfg
Equity Capital (Rs mn) 6346 Brown Forman 10 US 1 No Alcohol
Face Value (Rs) 10 Comcast Corp 67 US 1 No Media
Market Cap (Rs bn/USD mn) 729/16,529 Fiat* 12 Italy 1 In sp. cases Upto euro 0.31 Automobile
52 Week H/L (Rs) 1,381/670 Forest City 3 US 10 1 Real Estate
52 Week H/L – DVR (Rs) 940/464 Gujarat NRE coke 1 India 1 1/10th Metals
Daily Avg Vol (No of shares) 3282085 Haverty Furniture <1 US 10 1 5% of FV Others
Daily Avg Vol - DVR 417709 Hubbell Inc 4 US 20 1 Electrical Equipments
Hyundai Motor 46 Korea 1 No 2% of FV Automobile
Shareholding Pattern (%) Lennar Corp 3 US 10 1 Real Estate
Ordinary Mar 11 Dec 10 Sep 10
News Corp 47 US 1 No Media
Promoters 34.8 34.9 37.0
Pantaloon Retail 1 India 1 1/10th Re 0.1 Retail
FII/NRI 44.7 43.2 36.4
Samsung Electronics 118 Korea 1 No Electronics
Institutions 12.7 13.7 17.5
Tata Motors 17 India 1 1/10th, Re 0.5 Automobile
Public 8.3 7.8 8.4
Telephone & Data Systems 3 US 1 No Telecom
DVR Mar 11 Dec 10 Sep 10
Viacom 29 US 1 No Media
Promoters 18.9 19.1 36.2
Volkswagen 72 Germany 1 No, Euro 0.06 Automobile
FII/NRI 40.7 41.9 25.2
* dividend up to Euro 0.155
Institutions 30.4 28.9 25.7 Source: Company, Bloomberg, Emkay Research
Public 10.5 10.7 13.4
Source: Capitaline Valuations
FY12E PER P/CEPS P/BV EV / Sales EV / EBITDA Dividend Yield (%)*
Ordinary 7.4 5.2 2.6 0.7 5.2 5.0
DVR 4.1 2.9 1.4 0.4 3.3 9.0
* over next 15 months
Source: Emkay Research

Emkay Global Financial Services Ltd 1

 Tata Motors Ltd Company Update

DVR discount narrows with higher share in O/s equity; However, reverse is
inconclusive
Our analysis of DVR (% total equity) indicates that the discount is lower for companies
where the DVR has a higher share in total outstanding equity capital. As can be seen from
the table below, Viacom, Haverty, Hubbell, Forest City, Lennar, Bombardier, etc either trade
at significant premium or very low discount. However, there is a wide disparity in discounts
for companies where DVR have a lower share in total outstanding equity. At one end is
Volkswagen, which trades at a premium of 7.5% despite DVR accounting for 37% of the
equity and at the other end is Hyundai Motor, which trades at a discount of 65% where DVR
account for 13% of total outstanding equity. Also, there are entities (FIAT, BMW and
Pantaloon) which have a much lower float of DVR and the discount for DVR is also on the
lower side

DVR – Outstanding equity and discount/premium

Company Mkt Cap Share capital Share capital mix (%) (Disc)/Prem (%)
(USD bn) (mn shares) Ordinary DVR

Viacom 29 597 8.7 91.3 (12.5)

Haverty Furniture <1 10 10.5 89.5 35.7
Hubbell Inc 4 61 11.8 88.2 4.9
Forest City 3 158 13.7 86.3 0.0
Lennar Corp 3 187 16.8 83.2 23.6
Bombardier 13 1,775 17.8 81.0 (0.1)
News Corp 47 2,627 30.4 69.6 (5.3)
Brown Forman 10 145 39.0 61.0 (0.2)
Telephone & Data 3 98 51.0 49.0 (12.9)
Volkswagen 72 465 63.4 36.6 7.5
Comcast Corp 67 2,792 74.2 25.5 (5.8)
Tata Motors 17 634 84.8 15.2 (43.4)
Samsung Electronics 118 170 86.6 13.4 (32.6)
Hyundai Motor 46 285 77.2 13.2 (64.6)
Gujarat NRE Coke 1 558 90.9 9.1 (44.0)
Fiat 12 1,275 85.6 8.1 (19.9)
BMW 53 654 92.0 8.0 (32.6)
Pantaloon Retail 1 217 92.7 7.3 (22.8)

Source: Bloomberg, Emkay Research

Emkay Research 18 April 2011 2

 Tata Motors Ltd Company Update

Similar relationship between DVR discount and free float

Our analysis of free float yields the same results as in the case of outstanding equity. It
indicates that higher the free float, lower the discount. As can be seen from the table below-
Viacom, Bombardier, Lennar Corp, Forest City, Haverty, etc have higher free float of DVR
and hence, have a lower discount. However, the discount for companies having low free
float is significantly different across companies.

DVR – Free float and Discount/premium

Company Mkt Cap Free float (%) for DVR free float (Disc) / Prem (%)
(USD bn) Ordinary DVR (% share capital)
Viacom 29 20.9 99.8 98.0 (12.5)
Bombardier 13 16.7 99.7 96.5 (0.1)
Lennar Corp 3 31.2 96.7 93.9 23.6
Forest City 3 45.8 92.2 92.7 0.0
Haverty Furniture <1 100.0 96.7 89.1 35.7
Hubbell Inc 4 96.4 98.2 88.4 4.9
News Corp 47 54.5 99.2 80.6 (5.3)
Brown Forman 10 42.2 74.3 73.4 (0.2)
Volkswagen 72 26.9 89.9 65.8 7.5
Telephone & Data 3 65.3 69.8 44.9 (12.9)
Comcast Corp 67 99.9 98.1 25.2 (5.8)
Hyundai Motor 46 62.9 100.0 21.3 (64.7)
Tata Motors 17 56.9 67.2 17.5 (43.4)
Samsung Electronics 118 75.0 100.0 17.1 (32.6)
BMW 53 55.6 99.3 13.4 (32.6)
Fiat 12 66.0 69.9 9.1 (19.9)
Gujarat NRE Coke 1 50.4 47.1 8.5 (44.0)
Pantaloon retail 1 46.7 38.4 6.1 (22.8)

Source: Bloomberg, Emkay Research

Discount reduces with increase in float; Tata Motors – an exception

We also came across a recent instance of a reduction in discount following an increase in
outstanding number of shares/ free float. As can be seen from the graph below, there was a
sharp reduction in the discount of DVR of Volkswagen post the increase in the free float.
However, Tata Motors is a unique case, where the discount has increased with an increase
in free float.

VW – DVR free float VW – DVR Outstanding shares

20% 90% 20% 38%

0% 80% 0% 35%

-20% 70% -20% 32%

-40% 60% -40% 29%

-60% 50% -60% 26%

-80% 23%
-80% 40%
-100% 20%
-100% 30%
Oct-06

Oct-07

Oct-08

Oct-09

Oct-10
Apr-06

Apr-07

Apr-08

Apr-09

Apr-10
Jul-06

Jul-07

Jul-08

Jul-09

Jul-10
Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11
Apr-06

Apr-07

Apr-08

Apr-09

Apr-10
Oct-06

Oct-07

Oct-08

Oct-09

Oct-10
Jul-06

Jul-07

Jul-08

Jul-09

Jul-10
Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

(Disc)/Prem (% LHS) DVR Float (% RHS) (Disc)/Prem (% LHS) DVR Float (% RHS)

Source: Bloomberg Source: Bloomberg

Emkay Research 18 April 2011 3

 Tata Motors Ltd Company Update

Tata Motors – DVR free float Tata Motors – DVR Outstanding shares

-10% 25% -10% 18%

20% 16%
-20% -20%
15%
14%
-30% 10% -30%
5% 12%
-40% -40%
0% 10%
-50% -5%
-50% 8%
Aug-09

Aug-10
Apr-10
Nov-09

Nov-10
Sep-09

Feb-10

Sep-10

Feb-11
Jun-09

Jun-10
Dec-09

Dec-10
Oct-09

Oct-10
Jul-09

Jul-10
Jan-10

Jan-11
May-09

May-10
Mar-10

Mar-11

Aug-09

Aug-10
Apr-10
Sep-09

Feb-10

Sep-10

Feb-11
Jun-09

Jun-10
Nov-09
Dec-09

Nov-10
Dec-10
Oct-09

Oct-10
Jan-10

Jan-11
May-09

May-10
Mar-10

Mar-11
Jul-09

Jul-10
(Disc)/Prem (% LHS) DVR Float (% RHS)
(Disc)/Prem (% LHS) DVR Float (% RHS)

Source: Bloomberg Source: Bloomberg

Korean DVR – Higher discounts a country specific phenomenon

We found Korea as an isolated case where the discounts for DVR have been significantly
high (> 60%). However, we came across two companies in our sample where the discounts
have been ~35%. Interestingly, there is no significant difference in the characteristics of
DVR that warrant such a variation in discount for DVR across companies.

Company Mkt Cap Share capital Share capital mix (%) DVR Free Float (Disc)/Prem
USD bn (mn shares) Ordinary DVR % DVR % share cap
Daishin Securities 1 77 46.9 53.1 100.0 41.9 (34.4)
Hyundai Motor 46 285 77.2 13.2 100.0 21.3 (64.6)
Samsung Electronics 118 170 86.6 13.4 100.0 17.1 (32.6)
LG Electronics 13 162 53.2 46.8 100.0 16.6 (62.8)
LG Chem 31 74 89.7 10.3 100.0 15.9 (63.9)
Daewoo Securities 4 204 51.9 48.1 100.0 11.7 (61.3)
Source: Company, Bloomberg, Emkay Research

Company Mkt Cap Voting Rights per share Extra dividend Business interest
USD bn Ordinary DVR
Samsung Electronics 118 1 No 1% of FV Electronics
Daewoo Securities 4 1 No Financials
Daishin Securities 1 1 No 1% of FV Financials
Hyundai Motor 46 1 No 2% of FV Automobile
LG Chem 31 1 No 1% of FV Chemical and electronics
LG Electronics 13 1 No Electronics
Source: Company, Bloomberg, Emkay Research

Emkay Research 18 April 2011 4

 Tata Motors Ltd Company Update

Peer comparison – DVR of Tata Motors at a higher discount

An analysis of discount/premium amongst the auto companies also indicates that the
discount in case of Tata Motors’ DVR is on the higher side. As can be seen from the table
below, DVR of companies like FIAT, BMW are trading at a significantly low discount though
they have a much smaller free float. The only company that has a higher discount is
Hyundai Motor.
Peer comparison
Company Mkt Cap Share capital Share capital mix (%) DVR Free Float (Disc)/Prem
USD bn (mn shares) Ordinary DVR % DVR % share cap
Fiat 12 85.6 8.1 1,275 69.9 9.1 (19.9)
BMW 53 92.0 8.0 654 99.3 13.4 (32.6)
Tata Motors 17 84.8 15.2 634 67.2 17.5 (43.4)
Hyundai Motor 46 77.2 13.2 285 100.0 21.3 (64.6)
Volkswagen 72 63.4 36.6 465 89.9 65.8 7.5
Source: Company, Bloomberg, Emk ay Research

Our View
Based on the above facts, we conclude that the current discount of 44% for Tata Motors’
DVR is on the higher side. As indicated earlier, in case of companies where the free
float/outstanding equity of DVR is 25% or less, the discount ranges from 6% to 64%.
However, in most cases (ex Korean and Indian companies) the discount is around 30% or
below 30%. Another point to note is that, with increase in free float of DVR, the discount
generally reduces. However, in case of Tata Motors, the discount has actually increased
post the increase in free float. We expect the situation to reverse. We do not rule out a
further increase in free float of DVR of Tata Motors. We see very little incentive for the
promoter to hold on to DVR (~19% holding), given the diluted nature of voting rights. Given
the superiority of DVR and efforts of the management to improve the free float, we expect
that the discount will reduce.

While we maintain our BUY on Tata Motors, we believe that DVR provides a much better
value given its attractive valuations and dividend yield (refer to the table below). We expect
the dis count for DVR to narrow to atleast 30% over the next one year.

FY12E Ordinary DVR

PER 7.4 4.1
P/CEPS 5.2 2.9
P/BV 2.6 1.4
EV / Sales 0.7 0.4
EV / EBITDA 5.2 3.3
Dividend Yield (%)* 5.0 9.0
* over next 15 months

Emkay Research 18 April 2011 5

 Tata Motors Ltd Company Update

Financials - Consolidated

Income Statement Balance Sheet

Y/E, Mar (Rs. mn) FY09 FY10 FY11E FY12E Y/E, Mar (Rs. mn) FY09 FY10 FY11E FY12E
Net Sales 713,843 924,130 1,227,070 1,380,672 Equity share capital 5,140 5,706 6,600 6,600
Growth (%) 101.0 29.5 32.8 12.5 Reserves & surplus 47,901 78,270 223,314 307,473
Expenditure 680,434 849,947 1,060,484 1,192,125 Net worth 53,041 83,976 229,915 314,074
Materials Consumed 480,246 614,954 781,656 876,944 Minority Interest 4,030 2,135 2,135 2,135
Employee Cost 72,974 87,518 86,348 95,357 Secured Loans 137,055 212,900 202,900 192,900
Other Exp 127,213 147,475 192,480 219,824 Unsecured Loans 212,684 139,023 80,098 60,098
EBITDA 33,409 74,183 166,586 188,548 Loan Funds 349,739 351,924 282,999 252,999
Growth (%) (17.2) 122.0 124.6 13.2 Net deferred tax liability 6,802 11,536 11,536 11,536
EBITDA margin (%) 4.7 8.0 13.6 13.7 Total Liabilities 413,612 449,571 526,585 580,744
Depreciation 25,068 38,871 40,481 46,067
EBIT 8,341 35,312 126,106 142,481 Gross Block 621,880 682,747 780,235 884,069
EBIT margin (%) 1.2 3.8 10.3 10.3 Less: Depreciation 332,691 344,135 384,616 430,683
Other Income 7,990 7,352 2,165 2,623 Net block 289,190 338,612 395,619 453,385
Interest expenses 19,309 22,397 18,193 18,926 Capital work in progress 105,330 80,680 73,359 73,359
PBT (2,978) 20,267 110,077 126,177 Investment 12,574 22,191 22,191 22,191
Tax 3,358 10,058 14,859 16,423 Current Assets 326,860 425,296 523,805 577,597
Effective tax rate (%) (112.7) 49.6 13.5 13.0 Inventories 109,506 113,120 148,194 166,154
Adjusted PAT (6,336) 10,209 95,219 109,753 Sundry debtors 47,949 71,912 97,869 109,767
Growth (%) (17.5) (261.1) 832.7 15.3 Cash & bank balance 41,213 87,433 102,559 66,028
Net Margin (%) (0.9) 1.1 7.8 7.9 Loans & advances 128,166 152,807 175,177 235,643
(Profit)/loss from JV's/Ass/MI 403 (542) - - Other current assets 26 24 6 6
Adj. PAT After JVs/Ass/MI (6,738) 10,751 95,219 109,753 Current lia & Prov 321,202 417,208 488,389 545,789
E/O items (18,323) 4,381 - - Current liabilities 239,802 340,773 384,057 428,770
Reported PAT (25,061) 15,131 95,219 109,753 Provisions 81,400 76,435 104,332 117,019
Growth (%) (29.6) (259.6) 785.7 15.3 Net current assets 5,658 8,088 35,416 31,809
Misc. exp 861 - - -
Total Assets 413,613 449,571 526,585 580,744

Cash Flow Key Ratios

Y/E, Mar (Rs. mn) FY09 FY10 FY11E FY12E Y/E, Mar FY09 FY10 FY11E FY12E
PBT (Ex-Other income) (10,968) 12,915 107,913 123,554 Profitability (%)
Depreciation 25,068 38,871 40,481 46,067 EBITDA Margin 4.7 8.0 13.6 13.7
Interest Provided 19,309 22,397 18,193 18,926 Net Margin (0.9) 1.1 7.8 7.9
Other Non-Cash items (76,005) (14,646) - - ROCE 5.2 9.9 26.3 26.2
Chg in working cap 53,452 43,790 (12,202) (32,924) ROE (9.7) 15.8 60.7 40.4
Tax paid (3,358) (10,058) (14,859) (16,423) RoIC 4.8 13.8 42.9 38.1
Operating Cashflow 7,498 93,269 139,526 139,200 Per Share Data (Rs)
Capital expenditure (532,309) (36,217) (90,167) (103,833) EPS (10.2) 16.3 144.3 166.3
Free Cash Flow (524,811) 57,052 49,359 35,367 CEPS 27.8 75.2 205.6 236.1
Other income 7,990 7,352 2,165 2,623 BVPS 79.1 127.2 348.3 475.9
Investments 336,155 (46,466) - - DPS 4.7 13.0 28.9 33.3
Investing Cashflow (188,164) (75,331) (88,002) (101,211) Valuations (x)
Equity Capital Raised 1,285 565 34,000 - PER (120.5) 75.5 8.5 7.4
Loans Taken / (Repaid) 233,890 2,185 (30,000) (30,000) P/CEPS 44.3 16.4 6.0 5.2
Interest Paid (19,309) (22,397) (18,193) (18,926) P/BV 15.6 9.7 3.5 2.6
Dividend paid (incl tax) (3,646) (10,019) (22,205) (25,594) EV / Sales 1.6 1.1 0.8 0.7
Income from investments - - - - EV / EBITDA 33.2 14.2 5.8 5.2
Others (34,588) 54,784 - - Dividend Yield (%) 0.4 1.1 2.3 2.7
Financing Cashflow 177,631 25,119 (36,398) (74,521) Gearing Ratio (x)
Net chg in cash (3,035) 43,058 15,126 (36,531) Net Debt/ Equity 5.6 3.0 0.7 0.5
Opening cash position 38,332 41,213 87,433 102,559 Net Debt/EBIDTA 9.0 3.3 1.0 0.9
Closing cash position 35,297 84,272 102,559 66,028 Working Cap Cycle (days) (42.1) (61.5) (41.0) (40.4)
* The difference between the closing cash as per balance sheet and as per cash flow is due to cash credit balances and exchange adjustments

Emkay Research 18 April 2011 6

 Tata Motors Ltd Company Update

Recommendation History: Tata Motors – TTMT IN

Date Reports Reco CMP Target

16/03/2011 Tata Motors Management Meet Update Buy 1,144 1,520

14/02/2011 Tata Motors Q3FY11 Conso Result Update Buy 1,144 1,520

10/11/2010 Tata Motors Q2FY11 Conso Result Update Buy 1,271 1,550

11/08/2010 Tata Motors Q1FY11 Result Update Accumulate 957 1,140

Recent Research Reports

Date Reports Reco CMP Target

08/04/2011 Maruti Suzuki Management Meet Update Accumulate 1,279 1,520

08/04/2011 Hero Honda Management Meet Update Reduce 1,695 1,590

03/03/2011 Eicher Motors Initiating Coverage Accumulate 1,101 1,505

14/02/2011 Apollo Tyres Q3FY11 Result Update Accumulate 51 58

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