Tata Motors Is The Only Car Manufacturer Worth Considering (But Not Now)

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About: Tata Motors Limited (TTM)
by: Brecht Hanssens
Summary

Tata Motors had a terrible 18 months, and the last quarter domestic sales dropped another 30% year-over-year.

While I don't like the car manufacturing sector as a whole, I think Tata Motors could be well positioned in the longer term because of three distinct characteristics.

Tata Motors is trading at a 5,8 price to earnings, which is a lot lower than the average multiple on car manufacturers. This is warranted because of the debt overhang.

While the company is winning awards and preparing itself for EVs, sales have been slumping and there is a sense of chaos throughout the company, with layoffs and write-downs.

Introduction of Tata Motors

Tata Motors is a multinational automotive company based in Mumbai, India. It has been in business for over 74 years and produces a range of vehicles such as passenger cars, trucks, vans, coaches and even military vehicles.

The company acquired Jaguar Land Rover from Ford Motor company in June 2008.

Tata is the largest automotive manufacturer of India. It should benefit from growth in its home market, but since having the Jaguar and Land Rover brands in its portfolio, a lot of attention has been drawn to these.

For these brands, more developed markets such as The U.S. and Europe are more important. China remains vital for the growth strategy as well.

In India, there are only 22 cars per 1,000 individuals. Compared to the US (980) and the UK (850), there is still a lot of growth left. China is the largest automotive market today. China has 332 million motor vehicles on a population of roughly 1.38 billion people, so that's a 24% penetration rate.

India is growing very rapidly and projects a 7% growth rate for 2019-2020. It shows similarities with China some decades ago. Let's dig into this later.

Rough ride in 2018

2018 was a rough ride for Tata Motors. The company dropped from above 32 dollar per share to 12.18 dollar per share over the course of 2018.

Chart Data by YCharts

Things stabilised in 2019 with the stock currently trading just below 12 dollars per share. So, what went wrong?

Global vehicle growth is cooling

Car companies around the globe haven't performed very well. The main culprit is China where sales have started to come down. Just recently, China posted declining car sales for the first time in 20 years. Sales fell by 6% year-over-year in the biggest auto market.

This article shows quite nicely that, in the important markets such as North America, Europe and China sales were flat or even down.

Jaguar Land Rover not performing well is an understatement

Jaguar Land Rover got into trouble in February of 2019 when it needed to find $1 billion quickly to pay of a bond maturing in less than 14 months.

Sales in the Chinese market dropped by 35%, the company will slash 10% of its workforce or around 4,500 jobs, and that's after 1,500 had left in 2018 already. Brexit fears don't help the troubled British manufacturer either. Moodys downgraded bonds of both Jaguar Land Rover and parent company Tata Motors after the news, to B1 and Ba2, respectively.

The auto-sector as a whole: why I'm not bullish

I believe there are several secular trends working against the automative industry. Firstly, I feel there are too many manufacturers in general. There are so many car companies around, there should be more consolidation to get economies of scale. However, many of these car manufacturers are considered 'national pride' and are not easily sold off to foreign companies for efficiency reasons.

Secondly, there's a shift in consumer demand. The car, especially in the developed world, used to be a sign of freedom and a positional good. If you own a fancy car 'you've made it'. I believe many young people do not view cars like this anymore. They just want to be taking from point A to point B in a convenient way. Car sharing companies such as Uber and Lyft will strongly reduce the amount of vehicles needed on the road to bring everyone to the point they want to be: in the future we won't need this many cars. People don't need to 'own' cars anymore.Thirdly, with climate changes becoming a very strong theme in many countries, governments are taking actions to encourage public transportation and start to raise taxes on individual cars. This, again, will hamper sales growth. Simultaneously, this brings up the electric vehicle race. Tesla and now others are very much involved in 'cracking the code' of electric vehicles. This requires a lot of capital, attention and sucks away near-term profits. All the companies are competing to be ready for the future, but are sacrificing now to reap in rewards later.

While I won't go into detail on all these trends, it's quite clear that sales are declining worldwide, especially in developed markets. Regulations are very local, so I can't dig into every country, but there is very much a trend towards more regulation.

Why Tata Motors is the exception to the rule

Having said all of the above, I do like Tata Motors. Here's why:

  • Exposure to India
  • Exposure to Electric Vehicles
  • Exposure to SUV's

I started the article pointed to the fact that there are only 22 cars per 1,000 Indians today. The entire Indian population is estimated at 1.34 billion. This means you have less than 30 million cars in India. This is what is being sold in China nearly every year for the past few years. If there is one market where growth can be expected, it's the 7%+ growing economy of India, where many of the concerns I voiced before are less concerning. Owning a car is still very much a positional good, young people want to own cars, and pollution-wise, the government is focusing more on economic growth for now rather than on climate. By the time the shift to sustainability starts, electric vehicles should be mature.

Secondly, Jaguar seems to be particularly interested in electric vehicles. The Jaguar I-Pace was one of the few electric vehicles in the higher range that could compete with Tesla. It even won the World Car of the Year award in 2018. Just a couple of days ago, it doubled down on producing a whole range of EV's in the UK.

The last month, mainly due to an overal drop in sales, EV's (and the I-pace on itself) accounted for 12,5% of total sales in the US. The company sold over 1.300 I-Pace's in the United States since the start of the year. In the Netherlands, the I-Pace was even the best selling car in December 2018. It sold over 2.600 I-Pace's while its second car sold only 16. This car is doing some things right. However, it has some faults of its own. The company is recalling 3.000 cars to check the brakes.

Thirdly, the trend for SUVs is still going strong. SUV market share stood at 36% in 2018, and especially in those economies were it's becoming more difficult (U.S., China, Europe), SUVs are performing well.

Figure taken from Land Rover slide deck

As you can see, there are plenty of SUVs in the portfolio, with a new model of the Defender coming out in 2019.

Unfortunately, no Land Rover shows up in the US top selling SUVs for 2018. However, one model does land spot number 8 in the UK, its home market, and an important car market in general. Land Rovers are considered at the high end of the range, so volume is not the most important metric, it's also about profitability per car.

Valuation: not good enough

Tata Motors has had a terrible performance over the last 18 months. Has it bottomed out yet? Hard to say. Personally, I would stay away from car manufacturers as a whole. I don't like the sector right now. In addition, Tata Motors doesn't pay a dividend, like many other companies do.

Tata Motors is trading at a $7 billion market cap today, with a P/E of only 5,8. Let's compare this to the PE multiples of some peers.

  • Daimler: 7,23
  • Ford: 13,06
  • GM: 6,05
  • Volkswagen: 6,7
  • Hyundai: 8

This gives an average of 8,2 times earnings. While this is of course not a sufficient metric to base any decision on, Tata Motors is trading at the lowest multiple of the entire group.

The biggest problem Tata Motors is facing, after the declining sales, is its debt overhang. The company has nearly $14 billion in debt while trading at a market cap of $7 billion. That's not very good. Tata Motors could always spin off or sell a part of Jaguar Land Rover, but Jaguar Land Rover's CEO reiterated firmly that the company is not for sale, only a couple week ago.

With Tata Motors dropping 30% in sales (in units) year-over-year in the latest quarter, in its home market India, things are not looking to bright.

I would not purchase shares at this point, because of the debt overhang and the uncertainty surrounding the company.

However, if there would be a major crash across the car manufacturing sector, this would be one of the first companies I would take a look at. In the longer term, it has a deep connection with one of the biggest growth markets (India), it has prepared itself well for EV's (Jaguar) and it has a premium range of SUVs, still fairly popular in developed countries (Land Rover).

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.