Tata Motors: Value in India's Emerging Markets

Tata Motors (TTM) is an Indian car manufacturer who recently came out with Nano Car that cost less than $2500. A lot has been written about its design innovation, supply chain, and execution.

One of the keys here is that Tata Motors created a whole new market for itself. Until now, the cheapest car available to the Indian population was at $5000. While Detroit was busy with making incremental changes and coming up with innovative financial schemes, Tata Motors was busy listening to its customer base. It listened and executed to come out with a car that its customers will buy.

Many in the Western world have critiqued the no frills, bare bones Nano car saying that it could have been designed in west, but would be difficult to sell in developed economies. But the point being missed here is listening to its customer base and designing accordingly. With its huge distribution network, design powerhouse, and existing infrastructure, the Detroit Big Three missed the bus not only in the US, but also in other emerging markets as well. Detroit missed riding the wave of small fuel efficient cars. I believe the Nano Car is an example of innovation driven by what customers want. It does not necessarily provide any technological breakthroughs, but it provides innovative ways in which companies address what its customers want. For example, GM gets approximately 250+ patents every year for its innovations, while Tata Motors has only 34 patents filed for the Nano Car. Tata Motors leveraged its existing patent portfolio and remixed them effectively to ensure they designed to meet customer requirements and price points. Tata Motors has positioned itself as the only one who can supply such cheap cars. It remains to be seen how Tata Motors' management converts this design success into a profitable one.

Another aspect that is being widely discussed is about Tata Motors' debt level. This debt level is due to buying of luxury brands Jaguar and Land Rover in the UK. I believe this is another example of the herd mentality. Because western auto companies are buried under debt, analysts are continuing to raise flags on any company with debt. Two aspects are being missed in this herd mentality.

1. Tata Motors' existing business continues to be profitable even during the recessionary period.
2. Tata Motors has excellent market positioning vis-à-vis products and Indian markets.

Yes, Tata Motors has debt, but it is something that I believe is at a manageable level.

Tata Motors' Nano Car is another example of innovation in business strategy and product positioning. Does this strike any similarity with Apple(AAPL) (iPhone), Nokia (NOK) (phones for emerging markets), and P&G (PG) (with design initiative)? All these companies are listening to their customers and adapting accordingly.

Where does TATA Motors fit in an investment portfolio?

Tata Motors stock trades as TTM (ADR) on the NYSE. The stock’s current yield is 1.5%, it pays dividends only once a year, and it has paid growing dividends since 2005. It is not a choice for dividend growth or any other dividend strategy. I view TTM as a potential value stock for long term investing in emerging market because of management's visionary goals and their execution to satisfy their customer base.

Full Disclosure: No position at the time of this writing.

Comments

[Chandragupta:]

Over the past decade or two, Ratan Tata has changed the face of Tata Motors from essentially a Truck & Bus manufacturer to a full fledged automobile company. Some years back, Tata Motor’s Indica, the first fully “Made in India” car, unshackled the near monopoly-like hold of Maruti – Suzuki over the fast growing Indian automobile market. Today, the Nano attempts to add another dimension to the market by its attractive price positioning. However, the Nano’s idea may not be as revolutionary as it first appears. The price difference between the Nano and its cheapest alternatives, the Maruti 800 and Maruti Omni is only about 20% or so, and not what you have mentioned. (On road, the Nano is expected to cost between $ 3200 to $ 4400 depending on the model you choose).

And the big question is - at this price, will it make money for the shareholders? Mr. Tata has himself admitted that his timing with the Jaguar – Land rover acquisition has clearly gone wrong. Given that the company is now saddled with huge debt and it sells everything from Jaguars to Trucks, what will Nano’s share be in the Tata Motor’s bottomline?

This is not to belittle Mr. Tata’s achievement in launching the Nano, but it needs to be noted that the Nano alone is not enough to put a buy on Tata Motors.

Aug 01 03:12 AM

[john s. gordon:]

those who criticize tata might as well criticize henry ford for abandoning the 'toys for the rich' business model & building a basic nofrills product that the average citizen & farmer could buy.
henry was very big on benefits to the farmers, tractors included.
> jack

Aug 01 09:54 AM

[Old Trader:]

Yestrday's FT had a full page article dealing with TTM's acquisition of Jaguar and Land Rover, and the pile of debt it incurred as a result. Eventually, things will turn out, but it'll take quite a while....no "overnight" miracles here.

Regarding the Nano, I recall reading that shortly (a couple of months) after they started taking orders, the bulk of the orders were for the upscale, more highly optioned version which was some 30% or so more expensive than the "base" model.

Aug 01 10:23 AM

[Rwong8200:]

Tata Motors reported a profit last quarter, if they can do it under the current circumstances my hats off to them. They are in the 2nd fastest growing market in the world. They just bought a world wide dealer base. Nano probably will not meet US Standards but it will for most of the world. I own Tata shares and expect to see them grow.

Aug 01 04:07 PM

[WatchTheVix:]

The 57% Profit increase was indeed unusual. Read a great articcle at Newsday.com/India My understanding is the profit increase was in a large part due to cost cutting from decreased raw materials costs and the SALE of interests in Tata Steel. Revenues fell and domestic sales slipped. There seems to be huge debt accumulating and the Jaguar Land Rover thing may not be a sucess.
I heard exports of vehicles were down over 40%
As a holder I was very excited about this rise in earnings and am now quite wary...... Vicky

Aug 01 05:20 PM

[tresspass:]

Within a few measly years the NANO brand in Asia will be like the Kleenex branding in the west.

" Oh honey, can you pick up some NANO with the milk on your way home."

it will be the most ubiquitous automobile in Asia.

Aug 01 08:53 PM

[User 148115:]

I own this stock, got in around $8. It's also touted by Ken Fisher, and should do better once the recovery sets in.

Aug 02 10:56 AM

[Traveler 1:]

TATA I think will continue to be a winner overall as a combined co., but I was upset when they bought Jag and Land Rover and is a mistake as all others have found out. The Nano will be a big winner for them. I also own this stock and hope they unload Jag and Land Rover soon!!!!!!!!

Aug 02 02:11 PM

[Subhankar:]

Tata Motors is India's largest truck maker. Cars are not their main business. Their earlier attempt, Indica, was hardly an engineering marvel. Production of Nano is nowhere near full-scale and it may be a couple of years before they start churning out volumes. Profits from Nano won't cover the huge debt burden of buying Jaguar-Land Rover.

But India's economy is on the mend and truck sales have started to pick up. That is good news for the company and the shareholders. Some equity dilution can't be ruled out.

Aug 03 10:29 AM

[TaurusBette...:]

The Nano has been on my radar for a couple years, when it was on the drawing board. However, the company has relocated due to riots in the original location--riots against Tata Motors for allegedly taking land from farmers. Now the factory is in Mumbai, which is not exactly a peaceful area. The company needs to take care of people in the communities in which it plants factories so that its public relations will be better and so that it can provide jobs and a product.

Aug 03 10:33 AM

[Avooch:]

tata is over overpriced

shanthi gears is priced right

jaiprakash is nearly priced right

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Aug 20 12:32 AM