Tata Motors: License to Dive

Tata (TTM) is India’s largest automobile manufacturer and the world’s 5^th largest medium and heavy commercial vehicle maker. They are #2 in medium to heavy bus manufacturing as well. They also provide financing for many of their buyers through their TML Financial Services unit. Tata acquired Jaguar and Land Rover from Ford in a (badly timed) $2.8 billion transaction that closed in June 2008.

I rarely write about ‘short’ ideas but this one seems to just jump off the page when you consider the fundamentals. Tata Motors closed at $13.78 last week and has jumped up to $14 /share in this morning’s rally (Nov. 23, 2009).

While Tata was able to post moderate profits during the economic boom years of 2005 – 2007, things have been pretty horrible ever since. Here are their per share numbers since 2004 as reported by Morningstar:

FY*	Sales	C/F	EPS	Div.	B/V
2005	12.57	1.15	0.78	Nil	3.57
2006	14.13	1.22	0.88	0.29	4.76
2007	19.96	1.49	1.01	0.28	5.50
2008	22.87	1.43	0.88	0.37	6.82
2009	32.35	d1.44	d2.99	0.35	1.55
2010**	34.30	d0.35	d0.96	0.13	0.60
* FYs end March 31. ** FY 2010 includes consensus estimates

Earnings predictability appears very low. Value Line estimates a further loss of $0.50 /share for FY 2011 while others see a smaller deficit of about $0.04 /share.

Their risky purchase of Land Rover and Jaguar (in early 2008) added more debt to an already levered balance sheet and it will likely continue to be a drag on corporate results.

Book value has been virtually wiped out since 2008’s peak. The dividend has been slashed and will probably need to be eliminated. Total debt exceeds equity and cash flow has been negative in both 2008 and 2009.

Despite all these negatives TTM shares have risen from their March lows near $3.10 to about $14. They have risk from both the manufacturing side and their financing arm.

Unless you’re a real believer in a quick, world-wide economic rebound TTM looks like a good candidate for outright shorting or through the purchase of puts or the sale of naked calls (for those who are comfortable with this riskier way to play).

Disclosure: Author went short TTM this morning.

Comments

[MalluFool]

Paul Price need to read Indian news before commenting on TTM. 2010 will be an exciting year for TTM. Because of the Stimulus package announced by Government of India, there is a huge demand for Commercial vehicles in India and who benefitted most, TTM. This festive season was the best season in the recent past, and Tata instroduced a brand new car Manza which is flying of the shelves. Then AutoExpo 2010 is round the conrner (2010 Jan), and TTM is ready to showcase couple of brand new products which is going to be introduced in 2010. Anyway, this is the worst time to sell TTM. I will wait another 6 months before deciding on this stock

2009 Nov 23 10:48 AM

[Nukedinvestor]

Paul,

Have you ever been to India? I went there last winter after 15 years! It's a different world, bud!
They can't make enough of the Nanos to meet the demand. Can you say $2500 ? Yes, that's what they are selling a CAR, yes you read that right, a car not a cycle. There's more than 300 million youths in India and I kid you not everyone wants to buy a car.
Most of what you say is already discounted and that's the reason the stock sold down to under $3. That's when I bought them and will buy each dip that articles like yours gift me :)

2009 Nov 23 02:00 PM

[AgAuMoney]

Hey Nuked, ever hear of a comma?

See how the meaning might change:

"There's more than 300 million youths in India and I kid you, not everyone wants to buy a car."

"There's more than 300 million youths in India and I kid you not, everyone wants to buy a car."

Commas are to help you convey your ideas.


I to think TTM has a LOT of room to grow. I doubled my stake last april, and if it gets down below my average cost I may double again.

I'm of mixed mind concerning the Land Rover and Jaguar acquisition. They came with a lot of baggage, and got TTM involved in a whole new set of politics. OTOH, iconic brands can be a great help both to establish a beachhead in new markets and to diversify revenues.

2009 Nov 23 04:57 PM

[Paul Price]

Perhaps the three previous commentors need to read income statements and balance sheets instead of just painting in broad brush comments about India.

TTM is losing big money with no signs of a near-term improvement.
Debt is excessive.

At $3 it was a good speculation. At $14 it's a good short.

2009 Nov 23 06:52 PM

[iStockWizard]

Near term outlook remains uncertain. Huge debt. Don't count on Nano much. Company isn't going to make much money from it.

2009 Nov 23 07:35 PM

[User 112880]

Pure electric Nano!

2009 Nov 25 01:24 PM

[StockBoy]

I would not "short" Tata, but I will take my profit, which is alot of $$$$, and let my origional investment ride with a tight Stop set to protect against a down side. I believe in India!

2009 Nov 25 05:33 PM

[Abraxas]

Sorry Paul, I love shorting, but your trade is truly a bad trade and worse advice.

You seem to have forgotten the cardinal rule of short trading: you short a stock (not a company) when the stock is at its weakest and breaking down. You should absolutely avoid shorting a stock when it could potentially break a new high.

One could hardly pick a worst moment to short Tata than the one you have advised. Whoever shorted it is losing 15% in just a few days!

You appear to think like an economist. Although you might find it hard to believe, economic analysis and trading are not the same. Trading is neither efficient, nor rational; in fact, good traders take advantage of these two factors.

Remember, the market (and your stock) can remain irrational a lot longer than you can remain solvent. With trades like this, you won't remain solvent for too long!


On Nov 23 06:52 PM Paul Price wrote:

> Perhaps the three previous commentors need to read income statements
> and balance sheets instead of just painting in broad brush comments
> about India.
>
> TTM is losing big money with no signs of a near-term improvement.
>
> Debt is excessive.
>
> At $3 it was a good speculation. At $14 it's a good short.

2009 Dec 01 12:57 PM

[Donaldman]

Well... as it is said..... Hind site is 20/20 .... here we are at
December 10th 2008 and the recommendation to short back on November
28th was a little premature. TTM pushing $15.50 at week end.... now
take your profit and see what happens in the first quarter! Wait for
the wheels to start coming off before shorting.

2009 Dec 11 07:53 AM

[Paul Price]

Are India's auto stocks running out of steam?

MUMBAI (MarketWatch) -- For anyone who took stakes in Indian car makers at the start of this year, there should hardly be any reason to complain, since on several counts, 2009 has been the best year the industry has ever witnessed.

Shares of three major auto makers -- Nano-producer Tata Motors /quotes/comstock/13*!t... (TTM 15.05, -0.10, -0.66%) (up 347% this year), utility vehicles maker Mahindra & Mahindra /quotes/comstock/11i!m... (MAHD.Y 21.76, -0.50, -2.24%) (up 275%), and Maruti Suzuki /quotes/comstock/11i!m... (MUDGF 31.15, +0.30, +0.96%) , the local unit of Japan's Suzuki Motor Corp. /quotes/comstock/11i!s... (SZKMF 26.35, +2.25, +9.34%) (up 205%) -- are among the top percentage gainers on the benchmark 30-stock BSE Sensex, which has itself gained 77.5% in 2009.

The stocks have prospered as stimulus measures by the government and the Reserve Bank of India to spur domestic consumption have helped car sales stage a strong recovery in 2009. The year before, higher interest rates and banks' reluctance to lend in a slowing economy had crimped demand.

The government reduced factory levies, waived farm loans and spent heavily to guard the country from the global economic crisis, while the RBI slashed its key lending rates, prompting local banks to cut rates too.

Local car sales, which have been rising sharply over the past few months, soared 61% in November to 133,687 units from 83,121 a year earlier -- their fastest pace in more than five years since a 73% rise in monthly sales in February 2004. This, albeit on a much lower base as sales in November last year had slumped 19% from the year earlier.

Sales had climbed 34% on year to 132,615 cars October, and 21% to 129,683 in September.

As 2010 knocks on the door, most analysts feel that the party for those shares may be drawing to a close as headwinds lay ahead with the growing possibility of a reversal of three key themes -- lower raw-material costs, benefits of fiscal stimulus measures and lower interest rates -- that marked the auto story in 2009.

With costs of key inputs like steel, aluminum, rubber and plastic starting to move up, companies plan to hike prices to save margins. Mahindra & Mahindra, Honda Siel Cars India Ltd. -- a joint venture between Honda Motor Co. /quotes/comstock/13*!h... (HMC 34.09, +0.08, +0.24%) and India's Siel Ltd -- and the Indian units of Toyota Motor Corp. /quotes/comstock/13*!t... (TM 83.20, -0.29, -0.35%) and Czech carmaker Skoda Auto A.S. have already said they will raise vehicle prices in January to offset higher input costs, and others may follow suit.

Analysts say that price hikes may not significantly dent sales, as they will be offset by continuing strong demand. Also, price hikes generally accompany discount schemes and value offers, thereby not making a new buy too heavy on the consumer's pocketbook.

However, the real test of sales volume will be when the government and the RBI tighten their accommodative policy stances.

The RBI has sent signals that it may be forced to start tightening rates as inflationary pressures pick up. Wholesale price index inflation rose to 1.34% on year in October and is widely expected by economists to outpace the central bank's projection of 6.5% by the end of the fiscal year in March 2010.

Further, with demand being robust, there are chances that the government may consider rolling back, either fully or partly, the excise benefit for small cars, which will shave off some margins. It had reduced the excise duty to 8% from 12% in December last year.

"Our economists think there is a 70% probability of a partial roll-back in excise duties with the budget," Citigroup said in a recent report.

As the trend of launching cars in India continues to gain traction, mounting competition is also likely to weigh on sales.

At least four new models -- Ford India Pvt. Ltd's Figo, Nissan Motor India Pvt. Ltd.'s Micra, Volkswagen India Pvt. Ltd.'s Polo, and General Motors India Pvt. Ltd.'s Chevrolet Beat -- will hit Indian roads in 2010.

The positive momentum in sales will most likely continue for another three to four months, as demand is strong and the impact from a likely stimulus withdrawal and competition will be felt with a lag, analysts say.

The caution regarding stocks seems to stem more from the fact that they have gained so sharply. It is interesting to note here that valuations for Tata Motors, Mahindra & Mahindra and Maruti Suzuki are still below their peak price-to-earnings multiples, and the three stocks currently trade at discounts of 26.4%, 6.3% and 8.8%, respectively, to their all-time highs.

However, analysts rule out any significant upside in the near term, except if the above hypothesis of rising interest rates and withdrawal of the fiscal stimulus does not play out.

"There are no triggers for the stocks to rise, as all the positives are priced in," says Vaishali Jajoo, auto analyst at Mumbai-based brokerage Angel Broking. She prefers Maruti Suzuki (12-month price target of 1,750 rupees or $37.67) for its strong national distribution network and Mahindra & Mahindra (target of 1,130 rupees or $24.32) for its diversified business model (tractors, sports-utility vehicles and cars).

Of course, it would be naïve to expect car makers to match this year's performance in 2010, as growth in 2009 was measured against the much lower base of 2008. As Ambareesh Baliga, vice-president, Karvy Stock Broking says: "For the industry to see a year like 2009, there will have to be an year like 2008."

The markets, he says, will increasingly focus on the month-on-month performance, and stocks will most likely correct if companies fail to match expectations

2009 Dec 15 10:57 PM