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Tata Motors: Our key assumptions - Views on News from Equitymaster
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Tata Motors: Our key assumptions
Oct 10, 2005

Tata Motors is India's largest commercial vehicle (CV) manufacturer, with a domestic market share of 60% (FY05) and second largest producer of passenger vehicles (18% of domestic demand in FY05). Its plants are located at Pune, Jamshedpur and Lucknow. Considering the net loss of Rs 5 bn in FY01 to a profit of Rs 12 bn in FY05, the company has come a long way. It has acquired the CV division of South Korean auto major, Daewoo, and this is likely to help the company to strengthen presence in the higher tonnage CVs market, an area that holds considerable promise in the future. Similarly, company has also acquired a 21% stake in Hispano, a Spanish bus-body building company, with an option to acquire the balance 79% stake. We have recently updated our research report on Tata Motors. Considering the performance of the industry, the company and our interactions with the management, we have incorporated the following assumptions for the next three years in our report.

Commercial Vehicles: With structural changes taking place in the country, we expect the domestic CV industry to grow at a CAGR of 8% over the next three years. Within this, we expect the domestic demand for medium and heavy commercial vehicles (M&HCVs) to grow at 6% CAGR. For light commercial vehicles (LCVs), we have projected a 12% CAGR over the next three years, primarily because of new category (sub one tonne) being added in the LCV segment from FY06. We have projected the contribution of this category to be around 30,000 units (18% of the domestic industry LCV sales) in FY08 as compared to nil contribution in FY05.

As far as Tata Motors is concerned, we expect the company’s M&HCV sales to grow by mere 3% in FY06 based on its dismal performance during 1HFY06 owing to unexpected contraction in demand from the northern region where the company has about 80% market share. We expect the industry to log in a 7% YoY growth in FY06 in this segment. However, in FY07 and FY08, we expect the company to outperform the industry growth. In the LCV segment we expect Tata Motors to register a 17% CAGR during the next three years compared to 12% CAGR for the industry.

Passenger cars: In the passenger car segment, we expect Tata Motors to register a 5% CAGR growth, thereby significantly underperforming our expected domestic demand of 9% CAGR in the next three years. The reasons for our negative outlook have been stated in the research report.

Exports: We expect the company to perform well on the exports front. We have factored in a 20% CAGR in volumes during the next three years for Tata Motors as against industry exports of 17% CAGR. For FY06, we have factored in a 21% growth in volumes. However, the management expects the growth to be around 35% levels with the potential of being as high as 50%. To that extent there is an upside to our export projections.

Subsidiaries: Going forward, we expect subsidiaries to play an important role in the performance of the company. We expect subsidiaries to contribute around 12% to 14% of the consolidated earnings. The management aims to increase the revenue contribution from subsidiaries to around 20% of the total topline from the present levels of 15% in the next three years, which we feel is achievable.

Raw material costs: We have factored in a 0.5% fall per annum in raw material costs (about 70% of sales) based on the assumption of relatively weak steel prices, which would act as a positive for the operating margins of the company.

To conclude:
We had earlier recommended the stock with a price target of Rs 690 on FY07 basis. However, based on our recent interaction with the management and the dismal unexpected performance of the company in 1HFY06, especially in the passenger car segment, we have downgraded our numbers to that extent, which has consequently led to a reduced price target of Rs 635 on standalone financials. Having said that, we believe, it is more prudent to value Tata Motors on a consolidated basis, especially when its subsidiaries are expected to contribute significantly in the long run. Apart from this, management has also indicated their intention of some kind of value unlocking in few of its subsidiaries. Based on consolidated expected performance, our price target stands upgraded to Rs 710 for FY07.

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