Tata Motors Well Positioned to Capitalize on India's Growth

Feb.16.10 | About: Tata Motors (TTM)

All attention turned to China after the fastest-growing developing economy became the largest auto market in the world. But just behind the Middle Kingdom is another rapidly growing auto market that investors can’t afford to overlook.

Mumbai-based Tata Motors (NYSE: TTM) is India’s largest car manufacturer and commands roughly 70 percent of the domestic market for commercial autos and 20 percent of the market for passenger vehicles.

India is one of the few developing countries where a domestic car brand controls such a large market share, but many foreign companies are eyeing the market as opportunities continue to grow.

In the third quarter, India’s gross domestic product (GDP) grew 7.9 percent, up from the 5.8 percent in first quarter 2009. And according to the International Monetary Fund (IMF), the Indian economy is expected to expand 6.4 percent in 2010. The country is modernizing its infrastructure in earnest, focusing on extending and improving roads. Tata Motors is well positioned to capitalize on the country’s economic growth and infrastructure build-out.

Tata’s success in its native land is a big contributor to overall revenue, accounting for 37 percent.

Tata has been in the European market for a while but is committed to expanding its footprint. In 2010, the company plans to roll out models in the UK, Norway and Denmark.

Its recent acquisition of the remaining 79 percent stake in Spain-based Hispano Carrocera, an established bus manufacturer, will expand its presence in Spain and around the world, including Morocco and other North African nations.

Amid the crippling economic crisis, Tata purchased Britain’s Jaguar Land Rover (JLR) from Ford Motor Company (NYSE: F). Acquiring JLR initially saddled Tata with some tough losses, but new car designs have reinvigorated the business. And these well-known luxury brands provide Tata with entrée to new markets.

Prior to the global credit crisis, shares of Tata Motors performed well, but the stock wasn’t immune to the broad selloff that occurred at the height of the panic. Tata’s stock underperformed the Bombay Stock Exchange Sensitive Index (Sensex) benchmark from mid-2008 until the end of the second quarter, when its quarterly performance unexpectedly turned upward.

Tata Motors started 2010 with impressive sales numbers. Sales, including exports, grew 77 percent to 65,478 units and pushed cumulative sales up 24 percent in the period from April to January. Domestic sales of commercial vehicles soared 107 percent, and sales of passenger vehicles reached an all-time high. Meanwhile, exports more than doubled to 3,276 vehicles.

Third-quarter results, though lower than expected, proved solid and improved markedly from previous quarters. The automaker generated a net profit of $86 million, up from a net loss of $48.4 million last year, and revenue soared 90 percent to $1.9 billion. With the economy recovering and demand rebounding, the stock also bounced back. Government stimulus and lower interest rates fueled demand, but the withdrawal of government funds, rising input costs and an increase in interest rates are concerns going forward. Nonetheless, analysts are confident the auto industry will remain robust. With increasing exposure to foreign markets and strong growth prospects in its own backyard, Tata Motors is well positioned to profit.

Disclosure: No positions