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Tata Motors (NSE:TATAMOTORS) is amongst India’s largest automobile manufacturers. It enjoys a leading position in the commercial as well as passenger vehicle segment in India. The company is also a strategic partner to the Indian Armed Forces since 1958. Starting in 1945, the company has already sold over 9 million vehicles and has more than 6600 sales and services points. Tata Motors went international in 1961 and today the company sells in more than 50 countries worldwide. Tata Motors is part of the $100 billion Tata group and shares its values and ethics. The stock valuation also looks attractive and given the increasing demand for automobiles in India, it should be a good stock to own over the long term.
Why is Tata Motors a Buy
i) Leader in Commercial Vehicle Segment
Tata Motors is the No.1 manufacturer of commercial vehicles in India. The company has an impressive portfolio of trucks ranging from sub-tonne to 49-tonne mass movers, and passenger transporters that range from 5-seater mini vans to 81-seater buses. Tata Motors is also the fourth largest bus manufacturer globally. It supplies light-to-heavy defence vehicles to the Indian defence, paramilitary and police departments. The company commands about 55% market share in the M&HCV segment and aims to reach 60% very soon.
ii) Strengthening Its Product Offering in the Passenger Segment as well
Tata Motors is known for making affordable cars but lacks on the aesthetics front. The company made an entry into the passenger vehicle segment with its Indica in the late 1990s. As such, the company is working towards launching many new stylish cars like the Zest, Bolt and GenX Nano to combat competition from its peers. The portfolio includes compact cars, mid-sized sedans, SUVs, utility vehicles, hatchbacks and crossover cars. The company’s new models Hexa, Tiago and Nexon are expected to be the increase the company’s marketshare in the PV segment. Tata Motors ranked fourth in the domestic PV space for FY 2016-17 after Maruti Suzuki (NSE:MARUTI), Hyundai Motor India and Mahindra & Mahindra (NSE:M&M).
iii) Should Benefit from India’ Growing Demand
India is expected to become the world's fourth-largest car market by 2020, growing at 25% CAGR since 2011. According to Auto Mission Plan, the passenger vehicle market could more than triple to 9.4 million units by 2026 from 2.8 million now, if the economy grows by 5.8%. Given Tata Group’s strong domestic presence in India, Tata Motors will benefit from the huge growth of the domestic market. If Tata Motors can get its act right in the passenger car front, then it will mark an inflexion point in its growth story.
iv) Strong International Presence As well
The company has operations in more than 160 countries around the globe. Tata Motor’s acquisition of Jagaur Land Rover (JLR) during the last decade has proved to be a masterstroke as JLR contributes heavily to both its revenues as well as profits. During the last quarter, retail sales in North America grew by 20%, China 38%, Europe was up 7%, but the UK and overseas saw a decline of 3% and 21% respectively. Tata Motors should benefit from an increasing demand for SUVs in the world's second-largest economy, China. The company witnessed a strong growth of 33% in CV exports in Q3’17. Export growth in FY17 is estimated to be around 20% and is expected to keep growing at this rate.
v) Jaguar Segment looks strong
During Q3’17, Jaguar Land Rover subsidiary posted growth in global sales volume in both U.S. and other international markets. JLR reported retail sales increase by 8.5% y/y driven by strong demand in China, North America and Europe. There has been a sustained customer demand for the Jaguar F-Pace, Range Rover Evoque and Land Rover Discovery Sport in these markets. The segment is set to launch its first electric vehicle i-Pace in 2018 which will compete directly with Tesla EVs.
Risks
a) Recent Quarter’s performance was not very impressive
Tata Motors’ Q3’17 PAT was about INR 1.12 billion compared to INR 29 billion in the same period last year. Consolidated net revenue was about INR 670 billion down from INR 700 billion in Q3’16. Q3 sales were largely impacted by demonetization drive in India. Domestic commercial vehicles volumes declined by about 4%. However, sales (including exports) of commercial and passenger vehicles for the quarter posted a growth of 7.5%.
b) Car sales predicted to decline in China
JLR is a crucial segment for Tata Motors accounting for nearly 90% of its operating profit and China is the most profitable market for JLR. China is also an important export market for Tata Motors. 2016 was a strong year for China. However, vehicle sales in China is expected to decline in 2017, as the government is reducing incentives on small engine cars. Weakness in the UK and European markets will also impact the company’s overall growth. According to the founder of Equinomics Research & Advisory “Macro environment is not conducive for CVs and the company may see a contraction in margins in the Chinese market”.
Valuation
The stock is currently trading at near INR 443, which is 26% below its 52-week high price. The market capitalisation value is INR 1,506 billion, with a P/E of almost 18x, which is low when compared to the industry average of 34x. The stock has returned 9% in the last year, which is also better than Mahindra & Mahindra’s stock that lost almost 4% during the same time.
Conclusion
Tata Motors is taking various transformational and strategic initiatives to stay relevant in the hyper-competitive vehicle market. The company expects a strong closing quarter based on a solid pipeline, growth strategy of Jaguar, growing defence order pipeline and promising launches. Its JLR brand is very strong in the luxury car segment and should benefit as overall demand for luxury cars gradually increase even in India. India is expected to become a large car market expected to reach 5 million units in annual sales by 2020. New launches should drive significant growth in international markets as well. Analysts expect Tata Motors to grow its earnings by 28% p.a over the next five years. Tata Motors is a part of one of the largest business houses in India and is also amongst the largest automobile makers in the country. It has multiple growth drivers both in India and abroad and I would look to buy the stock on dips.
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