Stock Review: TATA MOTORS

 

The spectacular turnaround at its JLR unit powered Tata Motors' show in FY11. But the European debt crisis and higher interest rates here could hurt growth. Investors should look at the company as a long-term bet

   Tata Motors, a leading player in the global and domestic auto industry, benefited from a sharp improvement in the performance of its Europe-based marquee brands Jaguar and Land Rover (JLR) during FY11.

Apart from strong vehicle sales growth, especially in China and Russia, the company's cost-saving measures in Europe also paid off. As a result, the company's JLR operations reported a segment profit of 7,700 crore for FY11, a rise of more than 140 times from a year earlier, while revenues in this segment grew by 42.3% y-o-y to 70, 218 crore. Total JLR sales grew 25% yo-y to 2.41 lakh units in FY 11 on strong demand.

JLR's operations accounted for nearly 57% of Tata Motor's consolidated revenues of 1,23,133 crore (approximately $27.4 billion) during FY11, and helped the company to deal with higher commodity input costs. Tata Motors has also improved its ranking in the latest Fortune Global 500 list to 359, from last year's rank of 442.

Tata Motors will shortly launch the SUV Evoque in Europe. Consumer interest for this model is understood to be strong. This should help the company to deal with the fallout of the European debt crisis. In addition, there are fears of a slowdown in the fast-growing BRIC countries. This has cast a shadow on its growth momentum in the short term.

In the domestic market, auto finance rates are on the rise and there are signs of a slowdown in the broader auto sector. Tata Motors' consolidated vehicles sales (including JLR) grew 11% y-o-y in the first two months of this fiscal, slower than the growth reported in FY11.

BUSINESS

Besides JLR, the Indian major is also present in Korea via Tata Daewoo Commercial Vehicles.

At home, the company is the largest player in the commercial vehicle market. But rising competition has meant that its combined market share (light and medium to heavy vehicles) has fallen to 61.8% at the end of FY11 against 63.8% two years earlier. In the domestic passenger car segment also, Tata Motors is among the leading players, with a market share of 13% at end of FY11, marginally lower than two years ago. The company's consolidated vehicle sales (including JLR) grew 24% y-o-y to 1.08 million units in FY11.

FINANCIALS

Strong growth at JLR boosted Tata Motors' consolidated performance. Its core consolidated operating profit (excluding amount capitalized, depreciation and amortised) rose 520 basis points y-o-y to 9% in FY 11, while net sales rose 33.1 % to 1,23,133 crore. In its smaller standalone operations, (which include commercial and passenger vehicles, coupled with financing of these vehicles) Tata Motors' operating margins ranged between 3.2% and 9.3% during FY09 and FY11. Rival Mahindra & Mahindra's standalone operating margins ranged between 8.3% and 15.9% during this period.

GROWTH DRIVERS & CONCERNS

Tata Motors is understood to have received strong consumer interest for its SUV Evoque, which will be launched soon. This should drive growth in Europe in the short term. In its domestic operations, however, rising auto finance rates remain a key cause for concern. Also, while commodity prices have shown signs of easing, they still remain at elevated levels. The company has also approached the judiciary with regard to its dispute with the West Bengal government for its Singur land.

VALUATIONS

At 1,034.9 per share, Tata Motors trades at a consolidated P/E of 7.1 times on a trailing four-quarter basis. M&M trades at a standalone P/E of 16.6 times, as the Street suitably values its array of businesses. Investors could consider Tata Motors as an investment on a long term basis.