Is the share price of Tata Motors undervalued at current levels?

Tata Motors Share price
Tata Motors Share price

 

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Tata Motors is an Indian automotive company which manufactures passenger cars, commercial vehicles, military vehicles and electric vehicles.

It is also one of the largest car manufacturers in the world. Tata Motors is a public company listed on the Bombay Stock Exchange (BSE) and National Stock Exchange of India Limited (NSE).

Setting the Table:

Before we begin our analysis/valuation of the share target price for Tata Motors; it is important to observe the facts, economy, industry outlook, financials, past performance and competitive advantages. After analysis, each section will form assumptions leading to our valuation.

Key Facts:

  1. Jaguar and Landrover made up 79.3% of total sales for Tata motors in 2017.
  2. Tata Motors had revenue of 274,492 Crores and sold 11,57,808 vehicles in 2017.
  3. Tata Motors has  76 subsidiaries in India and internationally, which provides a host of engineering and automotive solutions.
  4. Major Brands owned by the company are Tata (Commercial and India market), Tata Daewoo (International market, Jaguar and Land Rover.
  5. Over past three years, Tata Motors has lost market share in Passenger vehicles and Commerical Vehicles with the company looking to turn around the domestic business.
  6. Jaguar and Land Rover brands have been the primary growth driver for the company.

 

Industry Analysis

Tata Motors mainly does business in 3 segments: Luxury Cars (International), Passenger Cars (Domestic + Exports), Commercial Vehicles (Domestic + Exports).

Global Luxury Car Market : 

Jaguar and Landrover account for approximately 79% of Tata Motors sales. The growth of the company there is linked to the growth of the Global luxury car market and the market share of Jaguar and Land Rover in the market.

As of 2017, Jaguar had approximately 7.3% market share of the global luxury car market. The Luxury Car industry is dominated by German car makers Audi, Mercedes, and BMW with close to 75% market share.

Name of CompanyMarket Share
Mercedes Benz26.06
Audi23.40
BMW/ Rolls Royce25.11
Lexus8.47
Jaguar Landrover7.30
Volvo6.68
Porsche2.97
Total100.00

 

Currently, the total size of the luxury car market is approximately 29,66,187 crores.

The growth of the global luxury car market is dependant on the growth of world GDP and especially growth in developed economies.

The global GDP has been growing in a range of 2-4% for the past decade.


Assumption 1: The Global GDP with growth in the range of 2-4% for the next ten years and the Luxury car market will grow at the same pace as the Global GDP.

After its acquisition of Jaguar in 2008, the company has been expanding its operations and capacity in many countries. As the company continues to invest in research and expansion, I estimate that the firm will grow its market share from 7.3 to somewhere between 10-14% by 2027.


Assumption 2: Jaguar and Landrover will capture 10-14% of the Luxury car market by 2027.

 

Domestic Automobile Industry :

Another aspect of Tata motors business its sale of its products under the Tata brand in the Indian market and exports to other countries. It has tied up with Tata Daewoo and has captured a significant market share in South Korea. The company also sells under Tata Brand through exports or alliances with foreign partners.

The Industry is further sub-divided into Passenger Vehicles and Commercial Vehicles:

Passenger Vehicles: The domestic passenger sales have grown at only 2.9% CAGR (Sales in 2012 were 26,29,839, and 2017 were 30,46,727) for the past five years which is slower than the economic growth of the country.

In spite of the slow growth in the industry, there is a significant opportunity as only 30 out of 1000 Indians own a car.

Commercial Vehicles: The domestic commercial vehicle sales have seen a degrowth of -2.7% CAGR (Sales in 2012 were 8,09,499, and 2017 were 7,14,232) for the past five years which is slower than the economic growth of the country.

The CV is a matured market and growth prospects are limited.

Even though both segments have seen low growth rates, one should bear in mind that we have seen three bad monsoon years in the past five years and this has impacted the growth of the Indian GDP and these segments.

 


Assumption 3: The PV and CV market will grow at 6-9% each year in line with growth in per capita income and GDP of India.

 

Performance of Tata Motors

Let us now analyze the performance of Tata Motors in each segment.

 

Domestic Business

Tata Motors operates mainly in two categories in the domestic business namely

  1. Commercial Vehicles
  2. Passenger Vehicles.

The company had a market share of 44.4% in Commercial Vehicles and 5.20% of Passenger vehicles in India. Over the past two years, the company has lost market share in both segments.

Passenger Vehicles.

The management has given the following reasons for the poor performance in the India market in both segments:

  1.  Delay in product launches, and poor go to market strategy.
  2. Slow responsiveness to the competitive environment.
  3. Unsustainable cost structure.

On the evaluation of the Annual report, I couldn’t find a concrete plan of action from the management to capture more market share or a competitive edge in the coming years. This would imply that in the Indian market Tata Motors will have a low market share and will be forced to play catch up with dominant players like Maruti and Japanse car makers.

In my view from a strategy view point, the company can only grow either by having the lowest cost in the Industry or by product differentiation. The focus of Tata motors concerning the Indian market seems to be somewhere in between, and there is a question mark on strategic execution.

 

Assumption 4: Tata Motors will have 3–7% market share in the Indian Domestic  Passenger Vehicle segment. 
 

Commercial Vehicles.

Even though the same reasons have resulted in the loss of market share of Tata Motors from 49% in 2015 to 44% in 2017. Due to a dominant position, existing products, distribution network and brand image in the commercial vehicle space in India, I estimate that they will be able to maintain if not grow their market share in this area. Tata Motors enjoys competitive edge to some extent as of now, but it may change over time for better or worse.

 

 

Assumption 5: Tata Motors will have 40–48% market share in the Indian Commercial Vehicle segment. 

 

Jaguar and Landrover Business

In 2017 the Jaguar and Landrover business which is a UK Subsidiary of Tata Motors grew by 9% in sales. The sales from Jaguar and Landrover brands constitute close 79% of the Tata motors revenue. Therefore the success of these brands and products is crucial for the future of Tata motors.

The product differentiation and Brand image of Jaguaris strong giving it a good competitive moat around the business. Jaguar and Landrover will continue to expand into new markets and grow its market share. Also due to the premium nature of the segment, it will less impact by the recession as compared to other segments.

 

Assumption 6: Jaguar and Landrover will be a growth driver for the company. Growing between 8-12% each year.

 

The risk of Interest rates and Global Economy.

The interest rates are near negative internationally. Tata motors get close to 83% of its revenue from outside of India. The global economic growth and interest rate levels impact Tata motors business. If interest rates go up or if there is a recession internationally, Tata motors business can be affected in a significant way.

Tata motors can also be affected by technological changes and slowdown in the Global Economy. It is impossible to account for these events in our valuation, but one must keep a close eye on these factors and revise our valuation as things pan out.

Financial Statement Analysis

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Revenue :

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Tata Motors has a strong financial track record, with a strong management in place. The company earns close to 48% return on equity (PBIT/Shareholders funds). The sales to capital ratio are 3.22. The company has a debt of close to 56,071 crores. The company has dividend payout ratio of close to 12% (cash profit) indicating that the business is still in the growth phase and the company sees a lot of opportunities to grow the business.crores. The company has dividend payout ratio of close to 12% (cash profit) indicating that the business is still in the growth phase and the company sees a lot of opportunities to grow the business.crores. The company has dividend payout ratio of close to 12% (cash profit) indicating that the business sees still in the growth phase and the company. crores. The company has dividend payout ratio of close to 12% (cash profit) indicating that the business users still in the growth phase and the company a lot of opportunities to grow the business.

Revenue Growth:

Tata Motors has experienced a decent growth rate of 12% CAGR in revenues over the past 7 years (2011-2017).The revenues in 2017 were impacted by difficult global events like Brexit ,B S-3 engine ban and demonization.

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YearRevenue
2011122127.92
2012165654.49
2013188817.63
2014232833.66
2015262796.33
2016275278.54
2017272692.41

tata motors share price


Assumption 7: Revenue of Tata Motors will grow between 8-12% CAGR for next 10 years.

Profit Margins:

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As of 2017 the PBIT (Profit Before Interest and Taxes) of Tata Motors is around 7.5%. The average in the last 7 years has been 9.74%.


Assumption 8: PBT margin will range between 8-11% in next 10 years.

 

Reinvestment:

In order to maintain and grow its revenue in the future. Tata Motors will need to reinvest its earnings in three things: manufacturing capacity, research & development, and Brand image.As of 2017 Tata Motors has a return on equity of 48%  which is very high and signifies that its strength lies in intangible assets like brand and research capabilities. we estimate that Tata Motors will spend close to 12% of its net revenue on capacity expansion each year. It will be spending 40,000 crores in CapEx in 2018 and has already laid out plans to expand production capacity and research and development.This high spending on Capex will lead to higher market share and revenue in the coming years in the luxury car market.

 

Valuation (Consolidated):

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Almost always as is the case with predicting future earnings, there are many possible outcomes. Therefore a scenario analysis is important. After considering all factors our valuation reflects Average Per Share value of 603 Rs per share with a company valuation of 226,888 Crores INR.  A range of 296 to 873 Rs per share value was discovered as a result of conducting scenario analysis on our assumptions.

Tata Motors share price

Stock Recommendation for Tata motors:

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The current market price of 380 Rs as against the valuation of 603 per share.Therefore we feel that Tata Motors is –undervalued valued by close to 37% which is a decent margin of safety as a value investor in a mature company. In conclusion – A long-term investor can start buying at current levels of 380 Rs and keep adding if the share price goes down in the short run. The time horizon will be 2 years. Please remember to keep an eye on news updates on the company with an eye on the assumptions mentioned in this report.

 

Please note that the valuation will be updated each quarter. As also will any news impacting any of the assumptions or factors in Tata Motor’s target price and valuation.so STAY TUNED.

 

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