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Asif SuriaAsif Suria (SINLetter) submits the long-case for Indian auto stock Tata Motors (TTM):

The Story:

Tata Motors is a company that belongs to the large Tata conglomerate which has a piece of almost every pie in India. Tata Motors originally built large trucks and buses in India before branching out into making cars in the 1990s. Tata Motors has been very successful in this endeavor and now ranks as the second largest car manufacturer behind Maruti Udyog (a joint venture between the government of India and Suzuki Motors). Its strong lineup of cars currently caters to the middle-class, luxury and commercial markets.
A large number of factors have come together to make Tata Motors an interesting investment for the long term.

  1. Thanks to a burgeoning economy, India now has one of the fastest growing middle-classes. Tata Motors existing models Indica and Indigo specifically target this market.
  2. India is one of the youngest nations in the world with two thirds of the population below the age of 35.
  3. The present government is attempting to improve India's infrastructure and new highways are being built to connect the largest metropolitan areas.

These factors have combined to make the whole auto sector a high-growth area in India with almost 30% growth in the passenger car segment. This explains why Ford Motors (F), General Motors (GM), Toyota Motors (TM), Honda Motors (HMC) and Hyundai have entered the Indian market over the last decade. What makes Tata Motors stand out amongst this group is its current research to build a people's car for 100,000 Rupees. This translates to roughly $2,200 and is a vision very similar to Henry Ford's vision of the Model T almost a century ago. Tata Motors is currently testing this car for safety as the car is made of non-conventional materials to keep costs low.

Revenue for 2004-2005 came in at $4.548 billion for Tata Motors and net income came in at $304 million. With operating income of $430.8 million, the operating margin works out to 9.4% which is quite impressive for an automaker.

Competitors:

The primary competitors of Tata Motors are Ashok Leyland in the commercial heavy vehicle segment and Maruti Udyog in the passenger car segment. Hyundai is also a strong competitor in the passenger car segment. Volvo has been increasing its investment in the automotive sector in India and so have a wide range of other international companies from Europe and America.

The Good:

  • Attractive current valuation with a P/E of 21.66 for a company that is experiencing high double-digit growth.
  • A strong balance sheet with $1.5 billion in cash and long-term investments versus $653 million in short-term and long-term debt.
  • Tata Motors has been increasing exports and reported a jump of 121% in exports during the quarter that ended on September 30, 2005 when compared to last year.

The Bad:

  • Ford, Toyota and Honda are steadily gaining market share in the luxury passenger car segment as
    they continue to develop cars that are suitable for the Indian market.
  • The research and development of the inexpensive "peoples car" could impact profit margins for many years to come. It is an admirable vision but remains a risky endeavor.

The Numbers:

P/S - Cash $472.3 Million
P/E 21.66 Long Term Debt $587.6 Million

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Source: The Long Case for Tata Motors (TTM)