Investment thesis for Tata Motors PDF

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Investment thesis for Tata Motors

Overview of the company Tata Motors is the largest seller of commercial vehicles (CV) in India, and enjoys a 45% share in the market. In addition, the passenger vehicles (PV) segment, the product portfolio consists of other compact passenger cars and SUVs. The company also owns the luxury brands – Jaguar and Land Rover. In the last year, company launched Tata Harrier and Nexon to expand its portfolio of existing products. Going forward, CV segment is expected to focus on smooth transition to BSVI emission norms, and PV segment will focus on driving volume sales to enhance profitability. Market outlook The market has been affected by economic slowdown for some time now. This has hit many sectors including the automobile sector quite a bit as there was a double digit dip (~45%) in Auto Index. This has been exacerbated by the recent outbreak, which has forced economies to take stringent steps to contain the Corona Virus pandemic. All sectors have been impacted, but automobile has seen a strong hit amid the 21-day nationwide lockdown announced by the government. Every segment, including cars, twowheelers, or commercial vehicles, have seen a significant double digit decline, even through customers are being offered heavy discounts. Manufacturing plants and dealers have all been shut down. Stock markets have also had their share of woes, and they have plunged sharply. Investors are jittery and the overall market sentiment is not encouraging. The bearish markets have been compared with the 2008 crisis and all sectors have shown a negative outlook since GDP growth estimates have been revised to nearly 2-3% for India. Tata Motors shares – Investment perspective Tata Motors stock is more volatile than the market, which is why it has shown a much steeper fall than the overall market itself. Adding to the system related risks, the company is somewhat more risky given its internal weaknesses, as reflected in last two years financial statements. The company has shown an inefficient use if resources have been reflected in declining Return on Capital Employed and Return on Equity in the past two years. The cash flow from operations also doesn’t seem very promising. There has been an increase in cash flow generation from non-core activities and cash flow from operations has been declining. Another red flag is that the company has seen a credit rating downgrade to BHowever, the positives include the rising trend in revenue and increase in profit margin. The company is working on driving sales numbers and margins even further. From about INR 130 in the beginning of March, the stock fell almost 50% to nearly INR 65 currently. We recommend a buy because the shares have value from long-terms investment perspective. The share price is at the lower level, and is expected to rise when the market conditions normalize. In addition,

though the company has a narrow economic moat currently, which is hinged on its luxury brands JLR, we expect a substantial potential in widening of this economic moat because of both historical trend and future expectations. The luxury car segment is driver of the economic profits for the company. The company has added its luxury car manufacturing capabilities in other large automobile markets which include Slovakia, Brazil and China. From a strategic perspective, this segment has high barriers to entry, which could prevent competition from eating into Tata’s market share. Also, the set-up and gestation times are on the higher side, which gives another favorable point to Tata Motors. Using its cost-structure as an advantage, it is well-placed in the market to drive volume growth and economic profits in the future....