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  • Tata Motors: Why it can be a ‘value’ buy

    Publish date: 27th June, 2018


    On 25th June, news headlines announced that Tata Motors plans to invest Rs 1.2 lakh crore in Jaguar Land Rover (JLR) over the next three years.

    Usually, investment plans cheer markets. However, this time, stock prices of Tata Motors fell 6% on the day of announcement. It was followed by another 4% correction on 26th June. This is a continuation of a near-35% fall in stock prices in the last 1 year, underperforming the Auto index, which rose nearly 7% over the same period.

    So why did investors react negatively over the last two days? The answer lies—as it usually does—in the fine print.

    Why the sharp correction in Tata Motors?

    For a long time, Tata Motors and JLR thrived on the diesel model in the auto industry. Diesel forms nearly 35% of JLR’s volumes.

    However, public perception of diesel cars and their environmental effects changed drastically after the Volkswagen episode a couple of years back. Car buyers are becoming increasingly sceptical about diesel cars. They are now looking for cars that are more environment-friendly. In the last fiscal ending March 2018, the share of diesel cars in this region has come down to 87% from 93%.

    In addition, JLR’s UK volumes have also been hit because of uncertainty over the timing and implications of BREXIT (Britain exiting the EU).

    On the financial front, while EBITDA margins are likely to be flat, the company is likely to stay in positive free cash flows (FCF) in the coming years.

    Related: How tracking EBITDA helps | 5 things to know about cash flows

    Another worry is that the US President indicated that they are looking at imposing tariffs on cars that are imported from Europe. JLR does not have a plant in US. It exports to US, which is a key market, from its UK plants.

    Bullish on Tata Motors: Is Tata Motors Undervalued?

    The sharp fall in the price of Tata Motors has been quite paradoxical because most analysts continue to believe that the stock has value in it. There is almost a unanimous view that Tata Motors is undervalued.

    Why we have a ‘BUY’ rating on Tata Motors

    The company has maintained its guidance on growth despite immediate worries over the diesel composition. We feel that over the next few quarters, the traction of growth and diversification will work in favour of Tata Motors. It would, however, be instructive to also look at how the company is calibrating its future plans and how it is combining the troika of alternate push, cost optimization and China focus to create a new growth trajectory in the future. Here is why:

  • As the focus on fossil fuels progressively reduces, the answer to running the billions of cars will be batteries.

  • JLR is betting heavily on its I-Pace Electric Vehicles which are likely to have a high level of efficiency (260-290 miles driving with one charge).

  • JLR plans to increase production in low-cost zones like Slovakia and also increase localization across India, China, Hungary and Slovakia.

  • Tata Motors plans to increase focus on automation and robotics in high-cost centres. Also, development costs are planned to be reduced through in-house engineering.

  • The company plans to increase its dealer network by 15% to 1,800 by the year 2023. Also 100% dealers are expected to be upgraded to the ARCH dealer network where the customer turnaround is higher by nearly 7%.

  • The one big take away from the JLR analyst meet was that the focus on China as the future engine of growth will continue.

  • By 2021, China will move to being the largest market by a margin from being the fourth largest market for JLR today.

Where does Tata Motors go from here?

We have a price target of Rs.445 on Tata Motors, implying 60% upside in the stock from current levels. The EPS for Tata Motors is expected to double between 2018 and 2020. That means, the stock is available at a PE ratio of 8x 2020 EPS. This can also be supported by a 310 basis points in the ROE over the next 2 years. That can leave a margin of safety for the investor.

Want to read the detailed report on the JLR Analyst Meet?

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