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The drive is missing

Tata Motors is the cheapest stock trading in the entire Sensex pack. But that is for a reason

Tata Motors, India’s largest auto manufacturer by revenues, is increasingly turning into a study in contrast with its star acquisition, the UK-based Jaguar Land Rover, churning out strong numbers quarter on quarter, while its domestic passenger vehicle (PV) business keeps hitting new lows. JLR, which was bought in 2008 from Ford Motor Co for $2.3 billion, besides accounting for 80% of the auto maker’s earnings, also continues to be its topline driver. In fact, for the just concluded third quarter, consolidated revenues were up at ₹63,877 crore, driven by a 61.1% y-o-y increase in revenues in rupee terms at JLR, while consolidated profit was up 173% to ₹4,929 crore, driven by record operating margins of 18%. While the volume performance was backed by the new launches (Range Rover, Range Rover Sport, Jaguar F type, XF Sportbrake and smaller engine options of XF and XJ), net average realisation growth was led by favourable product-mix (higher share of Range Rover and Range Rover Sport) and richer geography mix (higher share of China). 

In contrast to JLR’s performance, the domestic standalone business plunged to a new low. Revenues declined 27% to ₹7,770 crore following a 36% drop in volumes to 130,337 — an 18-quarter low. Tata Motors reported an operating loss of #460 crore owing to high fixed costs, heavy discounting and low volumes. This is the first-ever Ebitda loss in more than a decade for the company. The domestic business ended on a bloody note — adjusted loss of ₹670 crore, the highest ever in the company’s history. The only saving grace during the quarter was an exceptional profit of ₹1,948 crore on account of sale of investments in certain foreign subsidiaries to the overseas holding company, TML Holdings Singapore, and tax write-backs of ₹630 crore, which led to the reported profit at ₹1,251 crore.

Though Tata Motors, after a four-year hiatus, unveiled two new models for the domestic market, the timeline for their launch is not clear. It is already losing market share in the PV market, down at 8.5% as of December 2013 against 14% in FY12.

Interestingly, the analyst community is upbeat on the stock given JLR’s performance and the launch of the domestic models. All leading domestic and foreign brokerages have a buy rating on the stock, which is now trading at 7.5 times 12-month forward earning estimates compared with the Sensex P/E of 14 times. 

Though Ambit has a buy rating on the stock, analyst Ashwin Shetty believes that unless the company’s domestic business picks up, it will continue to lag its peers. “We are bullish on the JLR business, but 30% of Tata Motors’ standalone business is passenger vehicles and that needs to correct.” Ambit has a target price of ₹450 for the next 12 months, 13% higher than the current level of ₹398.

The lone rangers are Pramod Kumar and Jay Kale of IDFC Securities. Their take: “While the Street remains optimistic, we maintain Underperformer with a revised target price of ₹334.” Their advice: “Switch to Maruti Suzuki, which offers superior risk-reward."

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