Tata Motors Still Has Upside Potential

| About: Tata Motors (TTM)

Summary

Tata Motors has surged by 48% in the last one year and the rally is likely to continue.

Jaguar Land Rover will continue to be a major revenue and margin driver for the company with continued sales growth.

Government change in India and a likely shift in monetary policy will support local growth for cars and commercial vehicles.

Tata Motors (NYSE:TTM) manufactures and sells commercial and passenger vehicles. The company has a substantial presence in India. Tata Motors is the largest automobile manufacturer by revenue in India, the largest commercial vehicle manufacturer in terms of revenue in India and among the top four passenger vehicle manufacturers in terms of units sold in India during fiscal 2013. The company also has global operations in connection with production and sale of Jaguar and Land Rover, its premium brand passenger vehicles.

In the last year, Tata Motors has surged by 48% and this article will discuss the reasons for believing that the rally will continue.

The first point to discuss would be the Jaguar Land Rover segment, which contributes approximately 72% of the company's revenues. One of the concerns is that the segment has a significant presence in the United Kingdom, North American and continental European markets. With sluggish economic growth in these regions, the company can witness low growth.

However, contrary to this concern, the Jaguar Land Rover segment has been one of the primary stock price drivers. Even in challenging economic conditions, segment sales have increased to 372,056 units in FY2013 from 243,345 units in FY2012.

While sales volumes for the Jaguar Land Rover dropped by 6% year-on-year, the volume decline was more than offset by an increase in volumes from UK, Europe, China and Asia Pacific.

China is the most important market to mention where the sale of Jaguar increased by 28% and the sale of Land Rover surged by 51%. I believe that China will increasingly contribute to the segment sales in the future and this will help reduce the reliance on developed markets.

Even the Asia Pacific region, which includes some important markets like Japan, Australia and New Zealand, have contributed to overall volume growth and these markets will drive unit sales higher. I must also mention that with a change in government in India, speedy economic reforms can potentially create demand for the premium segment as income levels rise.

Tata Motors also has a strong presence in the commercial vehicle market in India. For FY2013, the commercial vehicles market recorded a modest growth of 1.7%.

As mention earlier, with increasing likelihood of positive reforms in India, this segment will also exhibit stronger growth in the foreseeable future. Also, the Indian Central Bank has signaled an end to the interest rate tightening cycle.

Over the next few quarters, interest rates can trend down and this will support the commercial as well as retail segment growth. However, the Jaguar Land Rover segment will continue to be one of the primary revenue and growth drivers for the company.

While Tata Motors had leveraged significantly during the acquisition of Jaguar Land Rover, the company's financial metrics are strong as of FY2013. Tata Motors had a leverage of 5.3 and a comfortable EBITDA coverage of 2.6 as of FY2013. This gives the company ample financial flexibility for growth. Further, Tata Motors generated an operating cash flow of $4.1 billion for FY2013 and this adds to the financial flexibility.

Among the risk factors, the most important point to mention is the fluctuation in input prices. In Fiscal 2013 and 2012, consumption of raw materials, components and aggregates and purchase of products for sale constituted approximately 63.8% and 66.1%, respectively, of total revenues.

Commodities have exhibited a high degree of volatility in a low interest environment and any potential price upswing in commodities such as steel, aluminium, copper, zinc, rubber, platinum, palladium and rhodium can impact margins or sales growth.

In conclusion, the positive factors are large and with rising income levels for a population of 1.2 billion people in India, Tata Motors is well positioned to grow.

In addition, the company has already made significant inroads in China and other important markets in the Asia Pacific region. At a forward (March 2016) PE of 8.5, the stock certainly looks attractive and investors can consider exposure to this Indian automobile major.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.