Zest Powers Tata Motors' Domestic Biz Revival

| About: Tata Motors (TTM)
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Summary

Zest is leading Tata Motors recovery in the domestic passenger vehicle market.

Modi government's focus on infrastructure development bodes well for commercial vehicle market.

Tata Motors domestic business is facing tailwinds.

Company is focusing on meeting the requirements of the defence sector.

Company is attractively priced in comparison to global peers.

Tata Motors Limited (NYSE:TTM) is India's leading automobile company which is present in both the passenger vehicle and commercial vehicle segments. The acquisition of the British Jaguar Land Rover from Ford Motors has proved very beneficial for Tata Motors. The Jaguar Land Rover division has helped it post very impressive numbers both on the revenue as well as profitability front in the past few years. Although its domestic business is bleeding, the profits from its overseas operations have cushioned the impact.

Tata Motors faced a challenging environment in its domestic market. The Indian economy grew at a sub 5% growth rate for the second consecutive year in FY2013-14. However, with the change of guard at the center and formation of a stable government led by pro-business leader Mr. Narendra Modi, the worst period for Tata Motors business is definitely over. The IMF and World Bank have projected an improved growth rate for India which is likely to be second highest in the world among the major economies.

Tata Motors is the fifth largest commercial vehicle manufacturer in the world. In FY2014 its share in the domestic CV market was 54.1% and in the domestic PV market was 5.8%. To improve its market share in the domestic market it has planned a slew of new model launches.

It has already launched ZEST sedan driven by REVOTRON - a newly designed next generation petrol engine. It has been well received in the market and has outsold its nearest competitor Honda Amaze for two successive months. Tata Motors has also repositioned the small car 'Nano' and launched a new variant 'Nano Twist'. The company also plans to launch this car in the Indonesian and European markets.

Tata Motors plans to launch BOLT hatchback in January 2015. Success of ZEST sedan and BOLT hatchback is crucial for reviving the fortunes of Tata Motors in the passenger vehicles category. In the commercial vehicles category Tata Motors is the dominant player. It has launched 'Prima' range of HCV's and Intermediate Commercial Vehicles(ICV) based on the 'Ultra' platform to take on the challenge from other competitors. These new products will help it compete effectively in the domestic and export markets.

Tata Motors is operating below capacity and increasing volumes in the PV and CV segment will help it make a turnaround. The company seems to be well positioned to capitalize on the opportunities. Another positive for the company is the increasing focus of the new Modi government on the domestic defence industry. India is the largest arms importer in the world and Tata Motors has improved its efforts to provide solutions for the defence forces. It has bagged an order to supply around 585 units of its 'Minusma' vehicles for the UN support missions in Africa and Middle East.

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Tata Motors scrip has rewarded investors handsomely during the last one year. It is currently trading around the $40-$42 price zone which could be a good entry point.

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TTM EV to EBITDA Chart

TTM EV to EBITDA (TTM) data by YCharts

Tata Motors enjoys the lowest P/E ratio and lowest EV/EBIDTA ratio among the global luxury automakers. From a risk-reward perspective Tata Motors is the best bet among the global luxury automakers. Jaguar Land Rover (JLR) accounted for approx. 85% of the Tata Motors turnover.

JLR has also formed a 50-50 joint venture with Chery Automobiles of China which will further strengthen JLR's position in a fast growing market. According to the Director's report forming part of the FY2013-14 annual report the Director's state "Jaguar Land Rover's joint venture with Chery Automobiles, China has been progressing well to develop, manufacture and sell certain Jaguar Land Rover vehicles and jointly branded vehicles for the Chinese market. The production will start in FY2014-15."

JLR also plans to set up a manufacturing facility in the state of Rio de Janerio, Brazil. With the domestic biz on the mend its prospects seem even brighter.

The pick-up in the Indian growth momentum, significant reduction in fuel prices and the likely reduction in the interest rates the next year are key positive triggers for the Tata Motors domestic business.

The key risks to the bullish thesis remain a major slowdown in the JLR user markets of china and Eurozone. As noted in the "Management Discussion and Analysis" section of the company annual report "Strategy with respect to Jaguar Land Rover operations, which includes new product launches and expansion in growing markets such as China, India, Russia and Brazil, may not be sufficient to mitigate the decrease in demand for our products in established markets and this could have a significant adverse impact on our financial performance. If industry demand softens because of lower or negative economic growth in key markets, including China, or other factors, results of operations and financial condition could be materially and adversely affected."

Significant appreciation in the British Pound could also affect profit margins as it will be disadvantageous for exporters.

In a nutshell, Tata Motors provides good investment opportunity at current levels but one should be watchful about the risks. Regular monitoring of the developing economic conditions is required.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.