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Event update: Tata Motors (Neutral) - Domestic market; near term pressures; building blocks intact

We attended the domestic business focused analyst meet of Tata Motors. While the company highlighted the near term pressures, we believe that steps taken to turnaround the domestic business will help the company through the cyclical downturn. The steps taken w.r.t institutionalized cost cutting measures, customer focus and new platform architectures will boost the long term competitiveness of the company, in our view. However, we remain concerned with JLR’s structural weaknesses.

• Near concerns to the fore, however long term building blocks in place: On the CV side, the company has seen pressures from the new axle load norm, the NBFC liquidity crisis, muted freight demand and high oil prices. However, the company has countered the slowdown with improving productivity, enhancing dealer network, focusing on rural areas and reducing expenses. The management expects the demand sentiment to improve going forward on the back an increase in government expenditure and pre-buying before BSVI.

For PVs, the management expects near term volume pressures on weak sentiments, financial crunch, rising fuel prices, higher vehicle prices and a weak fleet segment. However, demand is likely to improve as consumer gets adjust to higher vehicle/fuel prices. The new products with an accent on design, focus on safety (the Nexon is the only vehicle to get a 5 star rating), and customer satisfaction (has improved sharply in the JD Power survey) has helped turned around the PV business.

• Focussing on technologies/platforms - reducing turnaround time /costs: Platform rationalisations: The company expects to reduce the number of platforms across the group from 18 to 12 in the coming years to reduce break even points and development costs. Vendor rationalization: The company is also working closely with select vendors to co-develop products. It has cut the number of vendors to under 400 (down by 35%) in the past two years – to cut costs and provide a higher commitment to stronger vendors that can work on R&D.  BSVI transition: The company is ready for a transition to BSVI and will start selling BS VI vehicles from January onwards. For M&HCV’s the company believes it is at an advantage as it has already been using the SCR technology even in BSIV.

Overall, we believe there are near term pressures on the industry and TTMT will continue. However, on the domestic business TTMT seems to be have building blocks that will help it sustain profitable growth in the future – all standalone financial parameters have shown an improvement in the past 2 years. However, we remain cautious on the stock largely due to structural issues with JLR. Maintain Neutral with a TP of Rs175.