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Why This Indian Automaker Is Worth Considering as a Long-Term Investment
Posted by: Patricio Kehoe (IP Logged)
Date: December 11, 2013 05:30PM
When it comes to automobile manufacturing, Tata Motors Ltd. (TTM) is not necessarily the first company that comes to mind. Unlike traditional car makers, such as Toyota Motor Corp. (TM), General Motors Co. (GM) or Volkswagen AG ADR (VLKAY), the Indian firm recently entered the global stage, making it a relative newcomer in the industry. Tata Motors’ acquisitions of Jaguar, Range Rover and Land Rover was the first step towards international expansion, which means it will be competing directly with the previously mentioned vehicle behemoths.
Global Expansion and Premium Brands
Despite rather small sales volumes, which do not reach the 1 million vehicles per year mark, Tata Motors is India’s largest car maker by revenue. The firm enjoys a considerable market share of the passenger vehicle category, and by far the largest share of the commercial vehicle segment. Its wide range of products include micro-compact cars, sport utility vehicles, luxury passenger vehicles and large semi-trucks.
Most importantly, the company’s Jaguar Land Rover division has not only facilitated access to global markets, but has been outperforming continuously. Significant increases in revenue were made possible by the large margins these premium brands have to offer. And, further growth is expected on a global level, particularly due to rising demand in emerging nations. Nevertheless, being overly optimistic would be not be wise. The luxury vehicle segment offers great returns, and thus opportunities for growth, yet fierce competition is also expected. Whether Tata Motors can live up to the expected standards, which means improving vehicle quality, is uncertain.
Solid Market Share, Yet Obstacles Ahead
When it comes to the company’s major strengths, its 22 percent share of the Indian vehicle market is the first thing that comes to mind. Despite falling from its 26% peak in 2008, India continues to generate the largest sales volume, and is expected to continue doing so, as the emerging nation offers exciting growth opportunities. Nevertheless, some analysts believe Tata Motors could suffer from market share deterioration, as global OEMs such as Ford Motor Co. (F), General Motors, Volkswagen and Toyota, further penetrate the Indian market.
Tata Motors will surely have to continue investing in new models and vehicle platforms in order to maintain its market share, yet this could prove troublesome. An operating margin of 3.3%, and debt levels exceeding cash volume, are becoming a burden when it comes to additional investments. However, as revenue continues to grow, the firm can still work on improving margins, especially in the luxury brand segment. A new plant in Brazil, a great emerging market for Jaguar sales, surely represents a right step in this direction.
Worth a Long-Term Investment?
Despite certain risks and potentially unfavorable headwind from increasing domestic competition, investment gurus are bullish regarding Tata Motors. Sarah Ketterer, James Barrow, Jeremy Grantham and the investors at Caxton Associates, have either recently increased their stake in, or bought into, the Indian vehicle manufacturer. This is indicative of Tata Motors’ potential as a long-term investment. And, while currently trading at 16.7 times its trailing earnings, entailing a slim price premium of 8.4% relative to industry peers’ average, entry is feasible. In fact, the stock is still rather cheap, considering it has recently hit its 52-week high of $32.89 and continues demonstrating an upward trend. Overall, I feel optimistic regarding Tata Motors’ long-term prospects, despite the short- to medium-term obstacles it is facing.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
Guru Discussed: Caxton Associates: Current Portfolio, Stock Picks
James Barrow: Current Portfolio, Stock Picks
Stocks Discussed: TTM, GM, VLKAY, TM, F,