Stock Review: Tata Motors

Jaguar Land Rover (JLR) reported a 22 per cent year-on-year (y-o-y) rise in sales to nearly 23,000 units in November, aided by higher sales in the US and Europe, while the UK volumes recovered from the steep dip in October. Going ahead, favourable product and geographical mix (China sales being more profitable than UK) will help keep realisations above £40,000 and margins at buoyant (management guided 16-17 per cent) levels, according to Spark Capital. A weaker dollar versus the Euro and pound could pinch.

However, the domestic passenger vehicle sales for Tata Motors were disappointing in November, down over 40 per cent month-on-month (m-o-m) on a combination of factors, including increased competition in the space, supply side constraints and dipping demand for the Nano. Unless this trend reverses going into the next quarter, volume estimates will see lower revisions especially as the company has announced that it will hike prices for models other than Nano and Aria by up to 1.5 per cent.

On the bright side, commercial vehicle (CV) sales bounced back in November 2010, with medium and heavy CV sales up 17 per cent y-o-y. Tata Motors gained market share as Ashok Leyland volumes continued to struggle over the dip seen in October. Going ahead, small LCVs (Tata Ace) are expected to grow at 22-23 per cent over the next three to five years, which should see LCV volume growth at about 15 per cent CAGR over this period. The truck (goods, medium and heavy CVs) segment is expected to match this space, while buses (passenger vehicles) could grow below10 per cent levels.

The freight price index is flat m-o-m, although it is lower than last year (down 11 per cent y-o-y, according to IDFC Securities research, adjusted for the fuel price rise).

This is robust enough to sustain a strong demand environment, say analysts, despite the rise in interest costs. There is ample availability of funds, which is seen as a more critical factor compared to funding costs in determining demand outlook in the sector. The current pause in policy rate rise gives an additional breather.

The stock, at `1347.95, prices in a lot of the good news, analysts say. But the DVR (different voting rights) play looks attractive at an almost 40 per cent discount to this, at `820.50.

Issued at a 10 per cent discount in FY09, according to a BoA-ML report, given that the DVR free-float is about 18 per cent of total free-float, the discount is much steeper than similar DVRs globally. Hence, a possible narrowing is envisaged.

Robust JLR sales justify continued bullishness and the widening DVR discount offers a good route to play this