Steer Clear of Tata Motors

| About: Tata Motors (TTM)

By Irwin Greenstein

Tata Motors' (NYSE:TTM) stock has plunged 48.76% over the past 52 weeks from a high of $18.60 to the current price of $9.53.

You would think that the company has a real cost advantage over others in the segment. Tata Motors is owned by the Tata Group, whose diverse portfolio includes the world’s sixth largest steel maker, Tata Steel. With the skyrocketing price of steel, it would only make sense that Tata Motors would get a break from its brethren.

Turns out, that’s not the case.

On July 30, Tata reported that Q1 profit fell 30%, hit by higher input costs - especially steel prices. Net profit for three months to June fell to 3.26 billion rupees (US$76 million) from 4.67 billion rupees a year earlier on revenues which rose 14.4% to 69.2 billion rupees, the company said.

Rising interest rates and charges related to the company’s acquisition of both Jaguar and Land Rover from Ford also hurt the bottom line.

Despite being torpedoed by fixed charges, Tata still managed to sell more vehicles for the quarter: 133,079 vehicles for the quarter, including exports, from 128,095 vehicles a year earlier - a completely different story from shrinking sales by American and Japanese rivals.

While battling rising costs, Tata must now fend off problems on opposite sides of the socio-economic scale.

The company is engaged is a full-on war from Marxists and capitalists. The Marxists are protesting land acquisitions for a new factory; the capitalists are turning away from the luxury Jaguar and Land Rover marques.

Tata’s new super-cheap Nano cars hit a wall when farmers in West Bengal formed violent protests against the new factory that would build them. The region’s Marxist government had backed the protesters until recently, when Tata said it would move the factory elsewhere even though it’s 85% completed.

Activists have said they would only call off the often violent protests at the plant if the government returned 400 acres taken from farmers who have not accepted any compensation. The government acquired 997 acres of land for the project but activists insist the project needs only about 600 acres.

Ironically, the Nano is aimed at the very people who are opposed to the factory: first-time car buyers in India, where more than 45 million people use motorcycles.

The Nano is a cheap, tiny rear-engine, four-passenger car aimed primarily at the Indian market. It was unveiled at the 9th annual Auto Expo on January 10, 2008 at Pragati Maidan in New Delhi, India, to rave reviews. At $2,500, it was touted as the world’s cheapest car.

To make the car successful, Tata is under immense pressure to contain costs. Unfortunately, rising costs of raw materials coupled with delays from insurgent farmers has put the Nano off track. This is not great timing, considering that Tata has already sunk $350 million into the project.

Right now, though, the Nano seems stalled. In the face of the growing violence, some of the international consultants have left, and the construction work in the plant has been placed on hold since August 28, 2008. Worse, the climate of intimidation and confrontation has dissuaded experienced managers to work in the factory.

Late Tuesday, the media reported that the company would still begin making Nanos in October, under a backup plan to shift production to other sites. For the first two months, Tata will produce 10,000 cars a month instead of the planned 40,000, according to the reports.

Things don’t seem much better on the high end of the market for Tata.

In March of this year, Tata acquired both Jaguar and Land Rover from an ailing Ford for an approximate $2.3 billion.

It now appears that the deal could be huge mistake for Tata.

With little synergy between design, production and dealers, the company is saddled with the brands at a time when the market for them is peaking.

Tata pledged not to reduce staff or close plants - a possible albatross around management’s neck in the face of rising raw materials costs. While sales continue to climb in booming economies such as Russia, China, the US market has slowed from $4.00 gas.

Now, another problem is coming fast in the rearview mirror of Tata Motors: Chinese car makers. There are over 40 car manufacturers in China today. Combined, they could launch a major assault on Tata’s core markets.

Disclosure: none