Tata Motors: Cruising With Explosive Growth

| About: Tata Motors (TTM)

Summary

The company has a large cash position of over $5 billion.

The stock price is down 31% YTD.

Indian economy is in a rebounding phase, helping profitability.

When people read about Tata Motors (NYSE:TTM), they think of Jaguar Land Rover and Daewoo brands. The company is so much more than that. They are the largest auto manufacturer in India and have been around since 1945, with 70,000 employees, over $42 billion in revenue and 9+ million cars sold in 50 countries. TTM offers micro, compact, and midsized cars and utility vehicles; light, intermediate, medium, and heavy commercial vehicles, tractors, buses, tippers, and multi-axled vehicles, as well as vans, defense, and all-terrain vehicles (ATVs). Their products are offered across a large customer base worldwide. In addition, Tata develops electric and hybrid vehicles for personal and public transportation. The company markets its products like most other manufacturers, through dealership, sales, services, and a spare parts network.

The stock has been on a meteoric rise since mid-February, up nearly 33%, and it is still down 31% YTD, so there is room to move upward. In comparison, the India market is up around 9% during the same time frame. Stock markets around the world, especially emerging economy markets such as India, have really come off of their first-quarter lows. In 2014-2015, Jaguar and Land Rover sales were a drag on the company due to the economic weakness and overall growth slowdown in Asia. However, the first quarter 2016 has seen a rebound, as Jaguar Land Rover have seen double-digit growth over the previous year. TTM has credited new product line releases and a pickup in Asian growth as the 2 catalysts for its strong performance so far this year. The stronger sales in North America and Europe account for most of the growth in the Jaguar Land Rover division.

I want to discuss the growth for the first 3 months of this year. Domestic sales slumped by 44% and total passenger vehicle sales fell 6% from the previous year. This downturn was offset by domestic commercial vehicle sales which were up 20% in March and 3% for the year. Exports also drove higher sales, up 17% in March and 16% over the previous year. TTM has been riding the higher volumes of Jaguar Land Rover, which is a good thing considering the Tata division has been a drag on performance. Most of the sales within that division are focused on Asia, as there are no real sales outside of India and China and maybe a few other countries.

Time Period

Number of Vehicles Manufactured

% Increase Month Over Month

% Increase Year Over Year

March 2016

50,204

(1.7%)

11.5%

February 2016

51,095

3.9%

11.5%

January 2016

49,196

33%

5%

Click to enlarge

If you look at the graph above from the Tata Motors website, you can see how strongly the January number was month over month. This can be partially attributed to the Indian government budget that was released recently and the committed funds targeting infrastructure improvements; local roads, national highways and railways. All this is promising for TTM, as most of the sales growth is in the commercial sector, including construction and hauling. You see, the Indian economy has gone from a predominately agricultural existence to an industrial one, thus the congested roads in the larger cities. Typically, Indian cars are manual transmission which makes traffic driving painful as many of you are aware. TTM's newer models offer Automated Manual Transmission, or AMT. It acts like a manual transmission, but the clutch is computer operated which makes it easier on the driver and a better ride. It is as a higher priced option, but TTM hopes that consumers will pay more for this feature. The fact is that these expansion programs put in place by the Indian government will directly benefit the largest auto manufacturer in two ways. They will be providing the truck and heavy equipment to build and develop this infrastructure, as well as providing low cost vehicles to drive on them. It's a win-win.

As far as competition, there are many. This table shows the debt/equity comparison and current YTD stock performance and how much better positioned TTM is in terms of their current debt load.

DEBT/EQUITY (mrq) Stock Return 52 Weeks

Ford Motor (NYSE:F) - 474.48 -14%

General Motors (NYSE:GM) - 172.00 -13%

Honda Motor (NYSE:HMC) - 92.81 -23%

Toyota Motor (NYSE:TM) - 104.00 -28%

Volkswagen (OTCPK:VLKAY) - 135.00 -42%

Tata Motors - 81.30 -30%

source: Yahoo Finance

I think TTM is oversold here at $28.25, even after the recent run-up. Their fundamentals are strong, and they have room to go, since the high is over $41. I am looking at this as a long-term holding, but there are always a few followers who like the covered call strategy so here is what I recommend. The July $31 strike is paying around 4.6% premium, and if the stock runs up another 10% in 2 months, your return is 14.3%. That works for me, but I wouldn't be so fast to cover on the entire position, so leave half uncovered for a nice long haul.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.