JLR Pace Drags Along the Rest

Tata Motors (TAMO), a Tata Group company is an Indian multinational operating in the automobile sector. Tata Motors manufactures and markets passenger vehicles in all the segments and light and heavy commercial vehicle. It also owns the Jaguar and Land Rover (JLR) brands which it acquired in 2008. Along with its subsidiaries, Tata Motors has presence in 175 countries and 6,600 touch points.

Strength
Tata Motors has grown its scale both with organic growth and acquisitions. It is currently the world's seventeenth largest motor vehicle manufacturer, fourth largest truck manufacturer and second largest bus manufacturer by volume. Through subsidiaries and associate companies, Tata Motors has operations in the UK, South Korea, Thailand, South Africa and Indonesia.

Tata Motors bet on buying JLR has proved fruitful. JLR is a global brand which commands a premium pricing power. JLR now contributes significantly to the conglomerate's revenues and profitability. JLR revenues grew by a robust 19 per cent in FY15 over the previous year. Demand from China witnessed a significant growth of 50 per cent. What further propelled growth were new launches of Range Rover and Range Rover Sport. JLR is doing well in India too with two models being assembled here.

In the commercial vehicle segment, Tata Motors has captured half of the market to itself. Though its share has come down from its historic levels of 60-68 per cent, buses and trucks carrying the Tata logo still have appeal in the domestic and international market. In the mass market where the low cost is preferred to premium, Tata Motors commands a huge advantage.

Tata Motors has been very successful in the light commercial vehicle segment. Its Tata Ace is a super-hit that revolutionised the segment and attracted competition. The company could not quite replicate the same success with the Nano even though the latter held quite a promise. Many blamed marketing for the Nano fiasco but the entire incident got the world's attention on Tata which delivered the world's cheapest car, at the time for $2500.

In the passenger vehicle segment, the Tata Indica and Tata Indigo were hit models owing to their low cost and high resale value. But obsolete technology that has not been quite upgraded has led to their decline. Tata Motors has not really had the same success with any recent launches. The belated launch of Tata Zest that seems an improvement over the past models has received positive reviews but needs time to prove a winner.

Growth drivers
On macro level there is a huge scope and potential in the Indian market. It is estimated that there are only 17 vehicles per 1,000 population which is lowest in BRIC region and other emerging markets. With road infrastructure on priority and connectivity of villages, even small town people are opting for cars - a phenomenon that was not possible or visible earlier due to bad roads and high pricing of cars.

Tata Motors has lagged in the passenger vehicle segment in the last 2-3 years. Much of the criticism was pointed towards the company's increasingly obsolete portfolio. Tata Motors recently launched sedan Tata Zest and has lined up its hatchback Tata Bolt. As per initial reports, Zest has received positive reviews but is could have a tough road ahead with competition from such super-selling models like the Honda Amaze, Maruti Dzire and Hyudai Excent. Tata Motors recent snag Mayank Pareek, former executive of Maruti Suzuki India to head its passenger vehicle segment should shake things up in the company.

In the commercial vehicle segment the company entered the Australian and Indonesian market in the last financial year. Both these markets are likely to help Tata Motors make up for the slowdown in exports to the Middle East and some European countries.

The huge demand and success of the JLR brands in China has led the company to open a new manufacturing plant there and will further strengthen its distribution. The new plant which is expected to commence by the end of FY15 along with new launched models like Jaguar XE, will help JLR increase contribution from China to its consolidated earnings. JLR is also eyeing the lower end of the premium segment in China.

Concerns
Tata Motors has struggled in the domestic market in the past few years. Its peak market share of 26 per cent seen in 2008 has fallen to 17 per cent in 2014. In the commercial vehicle segment, its market share has fallen to 50 per cent from earlier levels of 60-68 per cent. The major reasons can be attributed to fall in demand in the passenger vehicle segment and deregulation of the diesel prices. Though the company is trying to control the damage by launching new improved products, any successive failure can send the company into a tailspin as far as the domestic market is concerned.

Since its inception Tata Motors has enjoyed monopoly in bus and trucks. This segment is now witnessing increasing competition from the likes of Mercedes and Volvo. Tata Motors will have to consolidate its position in this segment or risk market share losses.

Financial
JLR has witnessed revenue growth of 40 per cent annualised in the past five years. It accounted for 43 per cent of the total revenues of Tata Motors but operating profits contributed 103 per cent. Despite a struggle in the domestic market, Tata Motors has managed a return on equity of 27 per cent and return on capital of 21 per cent. The company has been able to improve operating margins to 15 per cent in FY14 due to JLR.

Valuation and outlook
At a price of `496, Tata Motors is trading at P/E of 7.6, near its five-year median. Its operating profit yield is 25 per cent on its enterprise value, and net earnings yield of 13 per cent on its market cap makes it very attractive. Tata Motors has a cash pile up of ₹39,284 crore which is 28 per cent of its market capitalisation. The stock has risen on the good show by JLR but Tata Motors main thrust will come once domestic operations turnaround. Invest with a long term horizon.

This article was originally published on December 18, 2014.