Tata Motors: Corporate Background for the Attractive Indian Automaker

Jun.28.06 | About: Tata Motors (TTM)

Tata Motors (NYSE:TTM) is a key business of India's Tata Group, a $22 billion (in revenues) conglomerate with primary interests in steel, IT, commercial and passenger automotives, chemicals and telecom. The 140-year old Tata Group, feted by some as India's General Electric, is highly respected not just for its business prowess but also for its various social and educational projects that have contributed immensely to India's development.

Its holding company, Tata Sons, is 65% owned by charitable trusts, which doled out over a billion rupees last year - and trusts in India are not tax avoiding schemes like in the U.S. Recently, the "Tata" brand was valued at $5.5 billion, and has mindshare with "trust" - a Tata product is considered reliable and a value for money, more than anything else. All group companies pay Tata Sons a fee for using the Tata name.

As Time magazine noted in a recent story, the Tatas have given India its first steel plant, first cement factory, first science university (IIT's big brother, the world-class Indian Institute of Science in Bangalore, established in 1909), first shipping line, first airline (Air India, nationalized during the Fabian-Nehruvian socialism mania of the 1950s), first five-star hotel (the Taj Mahal Hotel in Bombay, built in 1903) and even India's first IT company (Tata Consultancy Services, established 1968). The story goes that the group's founder, J.N Tata, decided to build the Taj Mahal hotel when he was refused entry into one of Bombay's European hotels because he was an Indian, and it would be fair to say that the Tatas have retained the competitive spirit over the intervening century.

The Tata Group's Chairman, Ratan N. Tata, is recognized as the leading Indian businessman of his generation. Taking over as chairman in 1991 during a time of tumultuous change in India's economic landscape, he undertook a bold restructuring and reorganization of the group, and is widely given credit for the group's transition and success post the economic reforms of 1991 that made the Indian business environment far more competitive. Ratan Tata has repeatedly spoken of targeting what University of Michigan professor, C.K. Prahalad, might call "the bottom of the pyramid" - in other words, the market opportunity offered by the vast and voiceless masses of India. TTM Managing Director Ravi Kant has vast experience in the Indian automotive market, and is a veteran of the company, the right man in the right place at the right time.

TTM is key growth business for the Tatas, and currently contributes $4.6 billion or about 20% to the group's total revenue. It manufactured only heavy and light commercial vehicles, and its foray into passenger cars has been driven aggressively by Ratan Tata. Tata trucks dominate the Indian commercial vehicle landscape, having approximately 65% market for medium and heavy commercial vehicles (MCVs and HCVs), and 55%+ share for light commercial vehicles (LCVs). With the Indian economy growing on a clip of 6-8% consistently, and a need for rapid infrastructure and industry building, demand for commercial vehicles to move around all the industrial supplies and materials can only go north from here. All TTM has to do is make the stuff.

For passenger vehicles, the numbers are less impressive, with teething problems on some of its models (and stiff competition in the Indian passenger car market), such as the Tata Indica (compact car). TTM also offers the Tata Safari SUV and Tata Sumo MUV, and also has a presence in the mid-size car segment, with a slightly modified version of the Indica, called the Indigo. TTM's most ambitious project, the $2200 (Rs. 1 lac or Rs. 100,000) car is due out by CY 2008, and is by far Tata's biggest push into the passenger car segment. There will be no competitor at this price point. The compact car will have a 30 bhp engine, and will seat 4-5 people. The target market is the "bottom of the pyramid" - or the lower middle-class to middle class Indian, who is looking to change to a car from a two-wheeler. With India's burgeoning middle class of over 300 million people, the car has a large market. Its customer is less in cities like Bombay and Calcutta, than the smaller towns and perhaps even villages of India, true to the chairman's vision.

The numbers also look good, standing testimony to the excellent management behind the company - with low borrowings and debt/equity ratio of 0.35, TTM will not be caught in a tight spot with the global trend of rising interest rates. Exports have been driving growth (TTM exports commercial vehicles to South Africa, China, Russia and Sri Lanka, among others), with intense competition in the Indian passenger car market, but revenue growth has been consistent and strong, tripling in the last five years, and the company has cash and cash equivalents of about Rs. 25 billion ($600 million). ROE stands at an incredible 23.5%.

TTM trades at a P/E of about 19, and looks like good value, especially after the recent fall in Indian markets. Rather than timing the market, I would buy now and buy more if there is further fall. With a top-notch management team and a visionary parent with deep pockets, willing to take on ambitious projects to go with the numbers, TTM looks like a great company with bright future.