Chart: Why Tata Motors is the top gainer from the Sensex pack

A lot of volatility was witnessed in early trade on Monday as key indices recovered after hitting fresh intr-day lows. India’s largest truck maker by sales, Tata Motors, gained 4.9 percent and is currently trading at Rs 169 on the BSE Sensex.

Tata Motors was the top gainer from the Sensex pack even though it had lost around 11.36 percent in the last three trading sessions.

On Monday, the company introduced a new model of the world’s cheapest car Nano, which boasts of increased fuel efficiency, a more powerful engine and new interiors, and will be sold at the same price.

[caption id=“attachment_136976” align=“alignleft” width=“380” caption=“Land Rover volumes in emerging markets is likely to offset the impact on the company’s EBITDA margins. Reuters”]  [/caption]

According to a report by brokerage firm Kotak, Tata Motors commercial vehicle business has maintained a strong growth in volumes despite slowdown in the industrial production.

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But the company’s EBITDA margins (operating profit) of the domestic business have declined significantly due to higher discounts, increased marketing spend and lower volumes in the passenger car segment.

The brokerage house has increased its target price for the stock to Rs 195 from Rs 180 earlier due to strong sales posted by Jaguar Land Rover. The entity posted a standalone PAT (profit after tax) of 1 billion, a sharp decline of 76 percent year-on-year due to forex losses.

However, retail volumes of JLR in the first half of financial year 2012 have increased 12 percent year-on year, driven by strong growth in emerging markets like China and Russia. Developed economies have reported a 2 percent decline in JLR volumes.

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Inspite of higher marketing spend and and higher contribution of lower priced models in Tata Motor’s product mix, higher Land Rover volumes in emerging markets is likely to offset the impact on the company’s EBITDA margins, says the Kotak report.

JLR has now raised production capacity to 300,000 units a year and has largely resolved its stand-off with Ford regarding engine constraints. The company is also setting up a 355 million manufacturing unit in the UK.

Domestically, Tata Motors expects volumes of passenger cars to benefit from the introduction of new variants as well as the aggressive marketing campaign of the Nano.The company expects moderate growth in the medium and heavy commercial vehicle segment.

While JP Morgan maintains an Overweight rating on the stock, Kotak has maintained an ADD, that is it expects the stock to deliver 7.5-17.5 percent returns over the next 12 months. This is largely because it has factored in the 6-15 percent increase in JLR earnings estimates on higher volume growth.