Steer Clear of Tata Motors

By Irwin Greenstein

Tata Motors' (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

Comments

[jdavid:]

Uh, the communist government of west Bengal bought the land which the Tata and suppliers plants are built on. It is the Congress party which is protesting.

2008 Sep 08 10:59 AM

[Chris B:]

Good points. Things turned nasty for TTM fast. Perhaps dumb deals like Jaguar and Land Rover should have been the first warning for investors.

2008 Sep 08 11:07 AM

[semant:]

don't worry. Tatas have a reputation to overcome the obstacles, whatever the cost and rise again.

2008 Sep 08 11:26 AM

[Eekonut:]

Just wait till the nano is launched and TTM's stock is going north of $20. You just wait!!!

2008 Sep 08 11:31 AM

[IWORKFORALI...:]

When Tata bought JLR,Ratan Tata said they we're in it for the long haul.He was shown the companies plans for future vehicles, including the hybrid models, which will blow all competitors out of the water.Tata was the only option for JLR to go forward as the dinosaur which is Ford was dragging it down with no money for development & continually blocking any new models put before them.
Ok,things have changed in the last couple of months but the flexibility of the workforce will see the company thro' the rough times & when things pick up we will be ready to deliver for Tata.

2008 Sep 08 12:34 PM

[parasmk:]

Good points. Ratan Tata, s/o JRD Tata is a tough nut and very much in control. All the Tata's work off of a long term vision - much like the chinese do. They don't mind short term losses for long term gains ... in this case BIG gains. If you can just imagine a new brand emerging for the commons running Jaguar technology (made cheap by the smart brains at TCS and likes) on time tested Tata engines, I don't see any competetion in the horizon. We are talking 2-3 years down the road though. Until then it's rough time for all car makers anyways until they all start churning hybrids and alternate energy models.

2008 Sep 08 01:53 PM

[stockezy:]

There is some very recent good news coming in, (read more on my website), that there is some kind of compromise between the Ruling West Bengal government, and the protesters. Tata will access how much land is required for the factory and its suppliers and distributors. Rest of the land will be returned to the farmers. Also additional government compensation will be paid for the Land being used. This has been informally accepted by all parties involved. ALso there is news that Tata will not pull out of West Bengal and Nano project will not see too much delay as was anticipated earlier.

2008 Sep 08 04:58 PM

[pegasus33:]

I can only speak emotionally, since I invested in ttm when it went down towards a 52 week low and then again when it went down further. It will go UP! Go TATA!!!

2008 Sep 08 09:36 PM

[User 258303:]

ndustrialisation cannot happen without considering the sensitivities of the rural community. Neither could they prosper without industrialisation. The Tatas had always been sensitive to the rural community and their investment in West Bengal did not start or end with an industrial project.

unfortunately business and politics are mixed in singur, Mamta benerji and congress are adamant and they want the 40% of land back to farmers (400 acres) which is now part of the car unit.

CPI/M all over India oppose land allotment by government. in Singur they are on the other side of the ring that is the difference . Tata's are infact relocating their plant from Singur and that is inevitable.

Sudheer Mopperthy
afmindia.blogspot.co

2008 Sep 09 03:35 AM

[User 258303:]

Industrialisation cannot happen without considering the sensitivities of the rural community. Neither could they prosper without industrialisation. The Tatas had always been sensitive to the rural community and their investment in West Bengal did not start or end with an industrial project.

unfortunately business and politics are mixed in singur, Mamta benerji and congress are adamant and they want the 40% of land back to farmers (400 acres) which is now part of the car unit.

CPI/M all over India oppose land allotment by government. in Singur they are on the other side of the ring that is the difference

Sudheer Mopperthy
afmindia.blogspot.co

2008 Sep 09 03:39 AM

[andyn:]

The focus on Nano is misplaced. The profit margin there is miniscule.
TTM makes the most profits from its commercial trucks and given that the rupee has plunged (going from Rs40 to $1 -> Rs45), they can really sell into overseas markets. Even though the Nano issue will be an overhang next month, the good ag season, wedding season and exports will help increase sales in the commercial sector, which is TTM's bread and butter. I see TTM at $15 by year end.

2008 Sep 09 10:31 AM

[telecom guy:]

My predictions are:
1. Land Rover and Range Rover technology will help in improving Tata SUV's sold in India i.e. Sumo and Safari. Jaguar will be assembled from completely knocked down (CKD) in Pune for sale in India.
2. Tata Motors will have to take a tax writeoff of approximately $100 million (450 crore rupees) for shifting the Singur plant to Pantnagar. Producing Nano cars in Pantnagar (a backward region) will help Tata Motors get income tax and excise duty concessions.

2008 Sep 10 03:32 AM

[sancerre:]

Ratan Tata is the best as far as corporate India is concerned.But considering all the pro's and con's buying Jaguar and Land Rover were big mistakes.Investor sentiment turned positive on the the Tata /Corus deal very fast,because it was a good deal.But that won't happen with Tata Motors. Even if Nano starts shipping from an alternate plant ,stock prices will stay below RS.500(app.13$) for a long long time....Sensex is headed for a breach of 10,000 anyway...

2008 Sep 14 07:51 AM

[Inventer:]

Initially; buying Land Rover And Jaguar did not seem to be a good idea; but, by doing THAT, TTM has an "Open Door" and an established Sales and Service Dealer in the Countries wherever those more expensive vehicles are sold...Enter the NANA! Considering the Elevated "Costs" of Jaguar and Land Rover, Tata could afford to Give a Nana Away, with each Expensive Vehicle Purchase. I think that TATA is the "New" GM=Largest in the World.
I think that the "Air Car" is a mistake; except that; "Talk" about That is "Free Advertisment" for Tata.

2008 Sep 16 11:58 AM