JLR has increased its capex for FY15 to 3.5-3.7 billion pounds. This is against its earlier guidance of maintaining the capex flat at 2.7 billion pounds in FY14.
This is a short-term negative for Tata Motors as it will increase the debt and it will not make the company free cash flow positive in this year or in FY15 as was expected earlier.
However, most analysts believe that it is a longer term positive for the company. As it reiterates its commitments to increase capex and it is looking to increase its presence in various geographies after the good performance that it has seen in China, so increasing in UK, Brazil etc. So after this improvement there are some expectations that perhaps volume assumptions for FY15 may go up as well.
For the near-term, however, CLSA points out that the maximum impact on the stock may be to the tune of Rs 27 per share because of the higher amount of capex, but now we have seen only about half of it play out in trade today.
Analysts also say that the news is incrementally negative only because the communication from the management has been that the capex will be flat and now they have gone ahead and increased it.
Going ahead they believe that the volume assumptions may be raised higher. For now CLSA has not changed its volume assumptions on JLR until it gets more clarity on what the exact product-wise capex could be.
So the brokerage house believes FY15 volume growth will stay at around 12 percent that is pretty much in line with what consensus is expecting as well. CLSA maintains an outperform rating on the stock. It has not changed its target on stock either and most analysts on the street have not changed their target based on this particular event.
CLSA has a target price of Rs 415. It believes the stock is now not a screaming buy, because most of the positives are already in the price.
So all in all the news is short-term negative, because it will impact debt and free cash flow, but in the longer term it is viewed as a positive.
Tata Motors stock price
On December 11, 2013, Tata Motors closed at Rs 377.80, down Rs 12.7, or 3.25 percent. The 52-week high of the share was Rs 405.00 and the 52-week low was Rs 252.10.
The latest book value of the company is Rs 59.47 per share. At current value, the price-to-book value of the company was 6.35.
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