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Tata Motors: A play on India's expanding road network - Views on News from Equitymaster
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  • Jun 17, 2011

    Tata Motors: A play on India's expanding road network

    This article is a part of the series on Indian companies listed abroad that we are doing for our UK based sister publication Moneyweek

    In the UK, Tata Motors, India's largest automobile company, is probably best known for its purchase of the Jaguar and Land Rover brands. And right over at the other end of the spectrum, Tata's Nano - the world's cheapest passenger car - has also grabbed column inches across the globe.

    Yet on its home territory, Tata is best known as a commercial vehicles company. The company controls about two-thirds of the entire sector in India, with sales growing at a compounded 13% rate over the past nine years, in line with the growth of the underlying market.

    There is huge potential for growth here. India's government is driving road development projects forward. Until now, railways have been the main means of transportation for coal, food grain and cement. But if you look at more developed nations, nearly two-thirds of non-bulk goods are transported via roads. There are plenty of reasons for this - road transport is more flexible, reducing transit and stoppage time. It's cheaper too - by about 10-15% per tonne mile compared to railways. And as India's road infrastructure develops, this cost gap is likely to increase - which means more commercial vehicle sales. As market leader, that's great news for Tata Motors.

    The future of Indian passenger cars

    Of course, a better road network will mean more passenger vehicles too. And Tata is poised to profit from that too - over the last 12 years the company's product mix has changed substantially. Medium and heavy commercial vehicles still account for a hefty chunk of the company's overall sales volumes, at 26%. But that's down from 42% in 1998-99. Meanwhile, passenger vehicle sales have grown from a paltry 4% of sales in 1999 to 32% of sales as at the end of 2010.

    The company is now one of India's top three passenger vehicle manufacturers (the top player is Maruti Suzuki). It is credited with launching India's first fully indigenous passenger car, the Tata Indica in 1998. Indica was designed to be inexpensive and simple to build and maintain, which did well in the Indian market.

    More recently, the Nano, the world's cheapest car, has drawn plenty of attention - not all of it good. Land problems at Singur (West Bengal) meant that the company had to shift production to Sanand (Gujarat). On top of that, to stick to its tag of being the world's cheapest car, the company may not be able to raise prices at will. With input costs rising, clearly, that would hurt profits. So Tata Motors will have to focus more on bolstering the sales volumes of this small car. The good news is that response to the car so far has been enthusiastic. Plus, the company is confident of production and volumes ramping up.

    The Jaguar and Land Rover story is entirely different. With the passenger market becoming more competitive, Tata had been looking for ways to acquire state-of-the-art technology. That's where Jaguar and Land Rover came in. By buying these from Ford, the company ensured it had access to technology that can compete with the best in the business. What's more, Tata Motors will also get to use the enormous distribution network of these brands, which will help the company go global.

    Again Jaguar / Land Rover is not without its problems. The financial crisis hurt the profitability of these brands, which hit Tata Motor's profits too. But the last three quarters have seen a substantial ramp up in sales and profits, which Tata Motors hopes will continue.

    Challenges are plenty

    Indian car sales have rocketed over the past few years. But this industry is cyclical, even in a fast-growing market like India - its fortunes depend on the wider economy. And now, after a stupendous couple of years, the company like its peers, is battling high input costs (already a dampener on profits) and high interest costs (which will be a dampener for vehicle demand). These concerns are expected to persist for the near term as India's central bank struggles to contain inflation.

    Over the longer term, the two biggest challenges for the company are staying ahead of the competition; and the development of India's road network. While the government is keen to develop the roads, actually doing it is where the hurdles lie.

    Should Tata Motors be a part of your stock portfolio?

    Tata Motors (NYSE: TTM) has excellent management, a wide distribution network and a strong product portfolio. As an investor, you have to account for the fact that this is a cyclical industry, but Tata is one of the best players in the sector.



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