Summary
- TTM Indian business in a sweet spot - Sales to double in 3 years, profits to grow exponentially driven by operating leverage.
- Defensive valuation provide a solid hedge on the downside.
- Jaguar Land Rover (JLR) sales continues to grow in major markets at a healthy rate.
- I expect the valuation multiple to correct and get closer to the sector average.
At the current price, Tata Motors (NYSE:TTM) offers a very attractive risk-reward profile. The stock trades at a P/E multiple of 10x (trailing twelve month earnings) which is a discount of 20 percent to the sector average P/E multiple of 12.6x (Table 1 below). The discount is even steeper - 42 percent, when compared to its Asian peers. Asian auto manufacturers trade at an average P/E of 17x on trailing twelve month earnings.
Table 1
World's Largest Publicly Traded Auto Manufacturers Relative Valuation Multiple
(click to enlarge)
Going forward I expect the stock price to outperform peers as the valuation multiple should expand to reflect the following:
- Improved visibility on growth prospects of India business
- Double digit earnings growth in FY - 2016 catalyzed by:
- Turnaround of TTM India business driven by -
- Accelerating growth momentum in Medium and Heavy commercial vehicle sales and Passenger vehicle sales
- A slew of new car launches over the next five years in the Indian market
- Notable margin expansion in the long term
- Continued growth in JLR sales on back of new launches scheduled in CY 15
- Turnaround of TTM India business driven by -
By the year 2020, India business will be a major contributor to TTM's business. Earnings from Indian business should add close to $1b to FY-19 earnings. In FY-2014, TTM generated annual revenues of $39b and a profit after tax of $2.2b. The domestic business of TTM in India incurred losses ($150m) but a very strong JLR business more than compensated.
Past few years has been painful for TTM
The domestic business of TTM used to be profitable a couple of years back but because of the economic slowdown and under performance of local brands the business ran into losses. In 2008, TTM had a 26 percent share in the India vehicle market but this has come down to 17 percent now. The dip in market share is primarily because of:
- TTM's failure to launch new models in the passenger vehicle segment. The pain was aggravated by a declining auto market
- High inflation rate and tightening of lending norms due to growing delinquencies
- Deregulation of diesel prices led to a decline in sales of its diesel cars. TTM is one of the major players in the diesel car segment
- Reluctance to offer competitive steep discounts led to reduction in market share in MHCV category from over 60 percent to 54 percent
In FY-2014, TTM sales of passenger vehicles and commercial vehicle segment declined by 5 percent and 22.7 percent respectively.
What has changed on the Domestic Front now?
The Indian economy is on the verge of witnessing a major expansion. India's latest manufacturing PMI (Purchase Manager Index) rose to 54.5, at its two-year high in December 2014. In the corresponding period a year ago, it stood at 50.7, just above the crucial 50 mark that separates growth from contraction. In November, the PMI stood at 53.3, which was at the 21 month high. The PMI trend is encouraging and we should see the economy strengthening from here onwards.
The early signs of growth in Indian economy has begun to reflect in the sales of number of TTM
Medium and Heavy Commercial (MHC) Vehicle sales were up 62.3 percent in December year-over-year. TTM sold 13622 MHC Vehicles in December 2014 as against 8276 in December 2013, registering a growth of 65 percent.
The growth though is on a small base, however what is important to note is that the rate is increasing every month. TTM is outpacing the industry growth!
TTM Medium and Heavy Commercial Vehicle Segment Performance
| ||||
Units Sold
|
Units Sold
|
% Growth YoY
| ||
Dec-14
|
13622
|
Dec-13
|
8276
|
64.60
|
Nov-14
|
10750
|
Nov-13
|
7695
|
39.70
|
Oct-14
|
11571
|
Oct-13
|
8934
|
29.52
|
The growth has just begin and investors would only be surprised going forward.
The recent expansion in MHCV sales has come on back of a few factors.
- Increase in fleet operator utilization levels of major operators
The utilization levels are now at 75 percent as against 60 percent six months back. Currently fleet operators have only started replacing their old vehicle, but an expansion in fleet is still to begin. In the months to come, the utilization level will improve further as the Indian railways recently implemented a 25 to 41% hike in rail haulage charges. Now road freight charges are about 15 to 20 percent cheaper than rail freight charges. We are still on the verge and TTM MHCV sales should demonstrate even higher growth in the coming quarters.
2. Increase in mining and quarrying activities
Due to ban on mining activities in the state of Odisha, Karnataka and Goa the mining activity in India was significantly curtailed which in turn affected the demand for commercial vehicles. However, in 2013 there has been partial resumption in the mining activities and this has led to some recovery. The mining activity, which was declining until Q4 FY2014, has started posting growth since the last two quarters. The growth will significantly accelerate in FY-16 as the Government is in the process of finalizing coal block allocation. Coal block allocation is expected to complete by March 2015, mining activity should witness robust growth thereafter, and this should help the demand for MHCV.
- Growth in Construction sector - Construction sector, which contributes ~7.4% to the Indian GDP, witnessed a 5 percent growth year-over-year in Q2 FY-15. This is the second consecutive quarter when the sector has grown close to 5 percent. The growth is expected to strengthen in coming quarters driven by Government reforms and spending. We should witness accelerated growth for CV from cement manufacturers.
TTM hopes to treble Exports of Commercial Vehicles by 2018
In FY-14 TTM exported 43,000 commercial vehicles and the target for current fiscal is 50,000. In the next three to four years, TTM aims to treble the exports to 150,000. The growth in exports will happen through introduction of new geographies and improving volumes in existing ones. TTM has recently introduced new models in the commercial vehicle segment, which are relevant for the new export destinations where it is trying to build its presence. Currently TTM exports primarily to Africa and Middle East. TTM is fast building base in other geographies, which include Russia and ASEAN nations.
Operating margins will expand much faster than sales
TTM is well poised to tap this growth opportunity as over the past few years it has invested in production and marketing infrastructure that can cater to a sales volume of 750-800k. Hence, investors can expect a major operating leverage benefit when full recovery happens. TTM has also worked on improving operating efficiencies over the last few years. The company has streamlined its cost structure and as of today the company can breakeven at just 35 percent capacity utilization in commercial vehicle segment which was not the case a few years back. The breakeven level was 50 percent capacity utilization then.
TTM Passenger Vehicle sales in India too have returned on a growth trajectory
In December 2014, TTM passenger vehicle segment registered a 30 percent growth year-over-year. TTM sold 12,040 vehicles in December 2014 as compared to 9,272 sold in December 2013. The growth has come on back of a new launch - Tata Zest and revival of Tata Nano.
The launch of Zest has been extremely impressive as the model compares very favourably when compared to competing models in the same price segment (INR 500,000 to INR 700,000).
According to Tata car dealers in India, Zest's sticker price and features have helped the model take a quick lead in the segment. Zest, not only is the cheapest sedan in its category, but has more to offer in terms of features. Zest offers some extraordinary features like alloy wheels, body-coloured side-mirrors with turn indicators and a turbo-charged petrol engine as standard in the base variant, while competitors have some of these features in their higher variants. This is not all, Zest is the only sedan in its category that has the automated manual transmission (AMT) option for its diesel engine.
Table 2 - Tata Zest versus Competing Models in the same Segment
(click to enlarge)
Source - www.carwale.com
Even sales of Tata Nano, the cheapest car in the world is now back on a growth trajectory driven by introduction of new models and a strong demand in the car rental market. Tata has recently opened up Tata Nano brand to be registered as a taxi and this perhaps has helped a revival in growth. Tata Nano has the best value proposition as a city cab when compared to any other entry-level car. It can seat as many passengers as any other entry-level car, offers a better mileage, and costs you about 50 percent less in capital cost. It offers almost all the features as any other entry level car. Because of its value proposition Tata Nano is well disposed and preferred among the car rental companies.
A slew of new launches in the passenger car segment to redefine Tata Motors image and change competitive dynamics
TTM aims to be back among the top 3 players in the Indian passenger vehicle industry in the next few years. Absence of a product pipeline and a cab manufacturer image had crippled the growth of the company in the passenger car segment so far, but going forward the company is prepared to launch two to three new models every year. The company has already frozen the launch pipeline till 2020.
Proposed Passenger car Launches in FY-2016
Tata Bolt - According to a press release from TTM on Bolt, Tata Bolt brings to the table a stunning design, which is an outcome of collaborative efforts of Tata Motors design studio in Pune, Coventry (UK) and Turin (ITALY). It is an attempt by Tata to reposition its brand; it looks to target the masses and move away from the shadows of its previous cab manufacturer tag.
Tata Bolt will compete against the segment leader Maruti Suzuki Swift. Other players in the segment include Volkswagen Polo, Hyundai i10 and Hyundai i20. The price range for Tata Bolt will be between INR 450,000 to INR 650,000.
Tata Bolt versus Competitors
(click to enlarge)
Source - auto.ndtv.com
Tata Kite
Tata Kite project aims to introduce a new model of entry-level car. From its portfolio of offering perspective the Kite model will be between world's least expensive car Tata Nano and the hatchback Tata Bolt. Tata will leverage the Indica platform to design Kite. Hence, Kite should offer fierce competition on the cost front and mileage too and this matters for any entry-level car.
With Kite, we are likely to see an entry-level car that cuts competition on all fronts - size, features, mileage, and cost too. This could be a game changer for Tata Motors.
Launch of the Kite sedan and hatchback version is expected mid-year 2015.
Tata Nexon Compact SUV
Tata Motors unveiled the Nexon design concept at Auto Expo 2014 held in New Delhi. Nexon will be the first entry of TTM in the compact SUV segment. This is one of the fastest growing segments in the passenger vehicle space in India.
Since Tata Nexon compact SUV will be sub 4 meter in length it will qualify for excise benefits and therefore competitive pricing can be expected. Tata Motors will leverage the same platform that defines the soon to be launched Bolt and recently launched Zest and hence the production cost will be significantly less.
Tata Nexon compact SUV will be pitched against Ford EcoSport, Hyundai ix25, Renault Duster, Maruti XA Alpha and Nissan Terrano. The launch is expected around November 2015.
Tata Nano - Cheapest AMT car in the entry level segment
The automatic variant of Tata Nano may just offer the right value proposition that would attract the masses. It is likely to improve the car positioning and help the company tap the target market. The automatic variant will boast an automated manual transmission and will be the cheapest car to offer the same. Nano with AMT is also likely to include a tailgate, which has been lacking in the existing versions. This would obviously increase the weight of the car and may affect the mileage too, but it would be an important addition as Indian customers have often complained about it. The version is likely to be priced anywhere between INR 300,000 to 400,000 (USD 5000 to 6600).
JLR Business continues to demonstrate strong growth in major markets
In FY15 too, the Company had a good start as it reported a 27 percent growth in volume in 1Q- FY-15. However, because of production issues sales growth slowed down in October and November and the stock price corrected around 10 percent thereafter.
But if we look at the December number the trend is encouraging. Sales growth in UK and US has bounced back in the positive terrain. Sales in UK grew 25 percent in December after dropping 3 percent in November. Likewise, in the US too sales returned to a growth trajectory.
JLR India sales could be the biggest surprise
JLR is a late comer in India and hence has to catch up with competitors on its distribution network and brand presence. Mercedes and Audi have a stronger sales network. In FY-2014, JLR sold about 3000 cars in India, while Audi sold around 11,000 units. BMW and Mercedes sold 9000 and 7400 units respectively.
The luxury sedan market has outpaced the growth of overall passenger car market. In FY-14 the luxury segment grew 12% while overall car sales declined 10 percent. Hence, JLR sales hold tremendous potential and could surprise on the upside.
One of the most promising launches by JLR in India is XE, which has the potential to lift JLR volumes significantly. Currently, JLR is growing faster than its peers in the luxury space are and with new launches and more competitive pricing (by virtue of local assembling) should help the company gather more pace.
JLR sales will witness higher growth in FY-16
About 30 percent of JLR sales come from China and the growth should surprise on the upside in FY-16. The growth in percentage terms may be lower because of significantly higher base but should be higher in absolute terms. Competitive pricing will drive growth in China, as JLR has recently commenced operations for its first overseas factory there. Local manufacturing would help JLR avoid heavy import duties and thus be able to price its vehicles quite competitively.
JLR is in the midst of a strong product pipeline and hence we expect growth across all markets to be strong.
Conclusion - The growth from Indian market for TTM business is likely to surprise investors on the upside. With 2 to 3 new launches every year until 2020 in the passenger vehicle segment TTM is poised to regain its position among the top 3 players in India. JLR sales in India are still in its infancy but this can potentially be a game changer for TTM India business.
TTM which is a leader in Medium and Heavy Commercial Vehicle segment in India is well poised to tap the growth offered by the Indian economy that is on the verge of exponential growth. A growing export market for MHCV will be an icing on the cake for TTM. The growth numbers witnessed in the recent months is an early sign of the extraordinary growth on the anvil.
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