Macquarie upgrades outlook on Tata Motors

As Tata Motors turns around its losses and returns to profitability, Macquarie has upgraded its rating on the company's stocks to 'outperform', with a target price of Rs789 a share – a 19 per cent jump from its earlier rating

Tata Motors will benefit significantly from the revival in vehicle sales in the domestic and foreign markets on the back of economic recovery. This along with the aggressive cost-cutting measures being undertaken at Jaguar Land Rover (JLR), its European arm, should result in a significant jump in consolidated earnings per share (EPS) over the next couple of years, the investment, advisory and financial services group said in a report.

Tata Motors' commercial vehicle (CV) business will likely drive growth in the domestic business. Macquarie expects CV volumes to grow by an average of 23 per cent for FY10 and FY11 on the back of a revival in the overall economy and a pickup in industrial activity, easier availability of finance, improvement in freight rates and changes in emission norms.

Meanwhile JLR is to turn profitable in FY11 (profit of £138m versus loss of £337m in FY09) on the back of a recovery in volumes and various cost-reduction initiatives being implemented by the company.

JLR's contribution to the consolidated EPS is likely to increase meaningfully if the recovery in the developed markets gathers pace or JLR's new products receive an overwhelming response from customers. Tata Motors' consolidated EBITDA is to double over the next couple of years, the report says.

For the first time since its perhaps ill-judged takeover of marquee brands Jaguar and Land Rover from Ford Motor Co in June last year, Tata Motors returned to profitability at the consolidated level in the quarter ended September. (See: Tata Motors posts Q2 net income of Rs21.78 crore)