Tata Motors New Coverage: Price Estimate at $33.11

Apr 3 2014, 12:56pm CDT | by

Tata Motors, a subsidiary of the Tata Group, is India’s largest automobile company. It manufactures and sells passenger and commercial (light, medium and heavy) vehicles under its flagship brands, Tata (including joint ventures and subsidiaries) and Jaguar Land Rover. Although JLR accounted for only 31% of the unit sales in fiscal 2013, the division contributes over 90% to our valuation for Tata, due to higher revenue per model, heftier margins and promising international expansion plans. In fiscal 2013, the company sold nearly 1.2 million vehicles and generated revenues of $34.8 billion.

We have divided the automotive operations of the company into three segments:

Our price estimate for Tata Motors is $33.11, which is roughly 8% lower than the current market price.

See Our Complete Analysis For Tata Motors

Jaguar Land Rover

Jaguar Land Rover is the most profitable division for Tata Motors and constitutes over 90% of the company’s valuation, according to our estimates. The British company manufactures premium cars and all-terrain vehicles, and boasts a strong global brand appeal due to its high-end design, technology and style. Since its acquisition by Tata Motors in 2008, sales for Jaguar Land Rover have increased at an impressive CAGR of 22%.

China to drive growth in top line

The U.K. had been the biggest market for JLR, constituting 20% and 24% of the brand’s combined unit sales in fiscal 2012 and 2011 respectively. However, weak economic conditions and negative consumer sentiment in the British carmaker’s backyard, slashed Jaguar’s retail sales by 14% year-on-year in 2012, reducing its market share in the region by 6%. The shrinking U.K. market was replaced by China as JLR’s biggest market in fiscal 2013, constituting 21% of the automaker’s unit sales.

Jaguar Land Rover expedited its ambition in China by entering into a joint venture with Chery Automobile in October 2012, as part of a 10.9 billion RMB investment. Establishing a foothold in the booming Chinese market, which is expected to account for around 20% of the global luxury market by 2015, could significantly impact JLR’s top line in the next few years.

Apart from China, Jaguar Land Rover plans to set up manufacturing bases in India, Brazil and Saudi Arabia in the next few years. As premium vehicles in India are expected to constitute 4% of all passenger car sales by 2020, JLR aims to benefit from the growth potential of this relatively untapped market. The company already assembles two models in India, using parts and engines shipped from factories in the U.K., and will begin assembling its Jaguar XJ sedan and Range Rover Evoque in the country soon.

Mass market vehicle launches could widen customer base

Jaguar Land Rover competes with well recognized brands such as Daimler (Mercedes), BMW, Audi, Infiniti and Porsche in the luxury segment globally. In 2013, while JLR unit sales were around 0.425 million, BMW, Volkswagen’s Audi and Mercedes-Benz posted much larger sales of 1.96 million, 1.57 million and 1.46 million vehicles respectively. This difference is mainly because the company operates as a premium sports car/SUV brand with relatively higher average price per model, also limiting its customer base.

However, Jaguar plans to expand its portfolio by launching new affordable luxury cars by the second half of 2015, including a crossover SUV and a compact saloon, the XE. The Jaguar XE will be launched to take on the 3-series, C-Class and the A4 in the global compact luxury car market. The starting price of the model is expected to be about $40,000, around 40% lower than the current average revenue per model. Jaguar also plans to launch four new models by 2018, and double its sales to over 750,000 units before the end of this decade. Though, the newer lower priced models will decrease average revenue per model, the company aims to boost its volumes by attracting a wider range of consumers.

Tata And Other Brand Vehicles

India is the largest market for Tata and other brands, constituting around 90% of the segment revenues in fiscal 2013. While the company ranks among the top four passenger vehicle manufacturers in the country, it is the market leader in the commercial vehicle segment. In the last couple of years, high interest rates, high crude prices and negative consumer sentiment have deterred growth in the Indian automotive market. Hurt by a constricting market size, Tata sold only 0.75 million vehicles last fiscal, 14% lower than the figure in 2012.

However, India’s vehicle market is expected to rebound due to low current levels of penetration and increasing disposable incomes. The country has a low vehicle ownership rate (~40 vehicles owned per 1,000 people), compared to the massive 850 vehicles per 1,000 people ownership rate for the U.S. Passenger vehicle sales in India are expected to grow to over 5 million units annually by 2020 and further reach 10 million units by 2030, catapulting the Indian auto market into the Global Big 3 (U.S, China and India).

Brand revival plans could improve market share

Negative consumer perception of the quality of Tata vehicles and lack of fresher products have hurt the company’s sales in the last couple of years. Consequently in 2012, the company lost its third spot in passenger cars and the overall passenger vehicle industry to Honda and Mahindra & Mahindra respectively. Tata’s massive stronghold in the truck segment has also somewhat been relinquished with the entry of Daimler’s BharatBenz in 2011. The MCV and HCV market share fell to 53% in 2013 from 60% in 2011, and continues to fall due to stiffer market competition.

In a bid to make up for lost ground in the Indian market, Tata Motors announced Horizonext in 2013, which is an aggressive strategic plan for its passenger vehicle business unit. As part of this strategy, Tata Motors unveiled 18 new models including upgrades and variants in January at India’s Auto Expo. In passenger cars, the company introduced a new hatchback, the BOLT, and a new sub 4-meter compact sedan, the ZEST. The company also launched new variants of its commercial vehicles Prima and Ultra at the Auto Expo. This is part of Tata’s plan to launch 35 products (including upgrades and variants) by the end of fiscal year 2014. With this move, Tata Motors hopes to uphold its strong position in the M&HCV segment.

However, due to the tough competition and negative brand impression, we expect only a modest rise in Tata’s market share in the next few years.

International expansion to add incremental sales

Tata Motors is also present in markets outside India, which contribute around 11-13% to the total revenues for Tata and other brand vehicles. In the next few years, Tata plans to make Indonesia an export hub by selling enough vehicles to allow for a local assembly factory. In South Africa as well, the company plans to sell around 30,000 vehicles by 2018, up from around 8,000 vehicles in 2013 and 6,500 vehicles in 2012. These key trends are expected to boost Tata’s revenues.

Cost-cutting measures to widen margins

EBITDA margins for Tata and other brand vehicles fell to a five-year low of 6.5% in fiscal 2013, hurt by lower revenues. Tata Motors has a high degree of operating leverage due to a large proportion of fixed costs. Due to this, volatility in the top line trickles down to the margins, and has a significant impact. Following employee layoffs at Sanand in Gujarat and Hubli in Karnataka, the company cut its workforce by 21% at the Pantnagar plant in the first quarter of fiscal 2014. The company drew up major cost-cutting plans such as reducing number of suppliers and lowering investment in subsidiaries, to tackle narrowing margins. Along with a reduction in fixed costs, an anticipated increase in sales should spread the expenses across a wider base. In the next few years, we expect the increase in demand and cost cuts to improve the company’s margins.

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