Tata Motors- Right time to invest in it?
TATA Motors is a global automobile manufacturer. When we think of TATA Motors, we think of Safari, Sumo but after it acquired Jaguar Land Rover (JLR) in 2008, It has become a dominant global player. JLR holds much significance for the company. For past 3 years, its contribution to its volume has been around 50% while contribution to operating profits averages around 73%. So, it’s safe to say that TATA motors is more of a JLR than TATA itself.
Why the stock has fallen so much?
Having fallen by more than 50% in last 1 year, if one tries to find the reasons behind it, it has to be JLR Sales. The Sales of these two brands have been highly unpredictable, especially in two important markets- Europe and China.
While in Europe, company is facing challenges related to diesel emission, in China the margins as earned in 2016–17 are no where to be found anymore. Falling volumes in these markets (making 46% of Volume in 2018) have been pulling the stock down. While volume decrease in China markets is linked to global slowdown, it might also be something to do with less liquidity for customers as Chinese government cracked down on peer to peer lending platforms. While fear of global slowdown may vanish, the later problem is much more significant, as less liquidity would mean lower expenditure on luxuries.
Launches in Passenger Vehicle good enough to revive share price?
While Commercial vehicle has been the mainstay of the company for its domestic business, it is now launching Passenger vehicles inspired by designs of JLR. Though, the launches are getting good response from the customers, are these enough to get the investors interested?
I don’t think so. Firstly, if we look at the Operating profits of standalone business (Passenger Vehicle+ Commercial Vehicle), its contribution to consolidated operating profits is in single digits. As shown in chart below, what TATA motors earns by selling one JLR is around 9 times of what it earns domestically.
Secondly, while currently Tata Motors domestic market for Passenger vehicle stands at minuscule 6% (2017), it would take much efforts and time and money to gain a respectable market share domestically. Existing players in domestic market are already struggling to find profitable growth. In summary, growth in passenger vehicle looks challenging and would not contribute much to the total earnings of the company.
Counting the positives-
JLR sales are very well diversified among various regions. Though China Sales numbers is important, we should see that North America and Europe each are also contributing almost equal contribution. While China and Europe markets are facing challenges, US market is growing well. Once there is stabilization in any of the two markets, that would definitely be positive for the company. For Chinese market while the company would hope the fear of global slowdown won’t materialize, for European market its hopes would be pinned on the electric launches slated for 2020.
Potential Risks-
China JV falling off. The company entered in a JV with Chery Automobile Company Limited (China) in 2011. Though the JV is for 30 years, it can be terminated in case the growth potential diminishes. Looking at the unstable in China Market along with growing global economic concerns, and Cherry Automobiles facing some hardships, Termination of the JV can be a huge risk.
For its stable Commercial business, the company is facing challenges with existing players like Maruti looking at this space for growth.
Final verdict-
It’s a wait and watch situation really till early 2020. By then, not only the company would hope of getting a respectable market share in domestic passenger vehicle segment, it would also hope of stabilizing China market and good response to its line of electric SUV’s.
