Tata Motors (NYSE:TTM), a subsidiary of the Tata Group, is the largest vehicle manufacturer in India. Tata's business has been divided into three segments: Tata and Other Brand Vehicles, Jaguar and Land Rover. Tata and other brand vehicles constitute less than 5% of the company's valuation by our estimates. This is mainly due to relatively low revenue per vehicle for this segment and heftier margins for Jaguar and Land Rover. In addition, sales have been declining for Tata branded vehicles, hurt by low domestic demand, poor quality perception, and sliding export numbers. We expect this division to continue to face headwinds until fiscal 2016 (ending March). Potential growth in passenger vehicle volumes and an uptick in the housing industry might turn the tide in Tata's favor in the long run. But despite factoring in a possible pick-up in sales, we expect revenues for Tata branded vehicles to remain below the $10 billion mark until fiscal 2020.
In this article, we will discuss the key trends in the commercial vehicle market that impact our forecasts for Tata's unit sales. Our price estimate for Tata Motors is $33.11, which is roughly 11% lower than the current market price.
Tata's commercial vehicles comprise light commercial vehicles (LCV) and medium and heavy commercial vehicles (M&HCV). LCVs include pickup trucks, small commercial vehicles, trucks and commercial passenger carriers with gross vehicle weight (GVW) between 1.2 tons and 7.5 tons (including payload).  On the other hand, M&HCVs are categorized into trucks, tippers, buses, tankers, tractors or concrete mixers with a GVW of over 7.5 tons.
Domestic Commercial Vehicle Market Faces Headwinds
A slowdown in infrastructure activities, along with low freight rates, caused a 20% decline in the Indian commercial vehicle market in the eleven months ended February. 
Infrastructural Activities Impact Volumes:
As commercial vehicles, especially M&HCVs, are deployed on a large scale for infrastructural operations, key trends in this sector significantly impact volumes. Infrastructural investments in India have slowed down in the last five years, affected by official bottlenecks and clearance issues associated with governmental organizations.  Financing problems also cast a shadow over this sector as banks, which had previously lent money to stalled infrastructure projects, have become wary of financing fresh projects. Possible easing of government policies following the General Elections this year, and speed-up in economic activity, might provide an impetus to infrastructural investments in the long run.
Low Freight Rates Impede Growth:
Due to low demand for transport, hurt by weak economic conditions, freight rates have remained low in India in order to facilitate travel. Freight rates impact profitability for truck operators, and thus affect their decision to purchase. While truck freight rates have more or less remain unchanged in the last couple of years, diesel prices and toll charges have been rising, narrowing operating margins for truck owners. However, truck freight rates have increased by 3-4% every month this year.  In addition, fleet utilization was up from 50-60% in 2013 to 70%. High freight rates and utilization levels could spur commercial vehicle sales going forward.
Declining Commercial Vehicle Sales For Tata
Tata's M&HCV volumes contracted by 24% through February, matching the fall in the overall market. However, the fall in the company's LCV sales outpaced the overall market during this period. While domestic LCV sales decreased by 17%, Tata witnessed a 30% decline in LCV volumes. For fiscal year 2013-14, Tata's LCV sales have declined by 32%, after having risen 22% in the previous year. The decline in LCVs comes as investments in the real estate sector stood at only $1.2 billion in the calender year 2013, down a massive 65% year-over-year.  As pickup trucks are widely used for construction purposes, a decrease in construction projects significantly impacts commercial vehicle volumes. A possible uptick in the housing industry going forward, bolstered by development in smaller cities, could spur growth for Tata and the overall commercial vehicle market. According to the Housing Start Up Index (HSUI) data released in India this year, housing activities in big cities such as Bangalore, Chennai and Kolkata decreased between 2009-2011, whereas small cities such as Bhopal, Dehradun and Hubli witnessed increases in number of housing starts during this period. 
Lower Excise Duty Could Spur Growth In Volumes
The commercial vehicle industry has suffered contracting volumes due to unchanged freight rates, low construction and infrastructural activities. However, in the interim budget 2014-2015, excise duty on commercial vehicles was decreased to 8% from 12%.  This development also prompted Tata Motors to cut prices across its commercial vehicle offerings (from $250 up to $2,500). Going forward, reduction in excise duty and consequently vehicle prices could spur demand for Tata's commercial vehicles.
Disclosure: No positions.