Investeringsanalyse, Piyush Jain, 12/08/2014
Tata Motors benefits from substantial profitability and returns generated by its premium brands: Jaguar, and Land Rover (JLR). Over the past five years, JLR’s revenue has grown at a compound annual rate of 40%, with global volume growing 21%. Though JLR accounted for 43% of Tata's total vehicle sales in 2014, it accounted for 103% of EBITDA. Over the last five years, JLR's EBITDA margin has averaged 11.0% but was 17.7% for fiscal 2014, owing to richer product and market mix driven by new model launches. This drove an impressive 26% return on invested capital in fiscal 2014, meaningfully surpassing our 9.9% cost of capital estimate.
From a 2008 peak of 26%, Tata's share of the total India vehicle market has retreated to 17% this year. The decline was largely due to drop in passenger vehicle market share. This was driven by Tata taking longer to introduce new models versus its peers, deregulation of diesel prices compromising its diesel range, and higher growth in motorcycle sales versus passenger car sales in a weak Indian economy. Tata's commercial vehicle share has also declined, but it continues to retain an industry-leading 54% of the medium and heavy commercial market. Once the Indian elections are past, we think the planned government spending of USD 1 trillion on infrastructure will boost the commercial vehicle market and benefit Tata's India business.
In our view, Tata is positioned to gain from the continued growth in Indian automotive sales, and from the expansion of luxury markets in emerging economies, especially China. Still, the imperative remains for Tata to keep investing in new models across brands and vehicle platforms. The company also needs to improve on its ability to execute vehicles at world-class quality levels. Quality issues plagued the Nano model, leading to disappointing sales. While improving, some JLR products still suffer from perceived poor quality. Growing industry overcapacity and fierce domestic competition, along with capital-intensive operations and the industry's cyclicality, pose serious challenges to Tata's ability to consistently earn returns above its cost of capital.
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Bull og Bear scenarier for Tata Motors
Bulls say
- Tata, as the largest commercial vehicle manufacturer in India, should gain from an upswing in government spending on infrastructure and the long-term growth potential for light commercial vehicles.
- India's vehicle density per 1,000 people is less than 20 and Tata has the means to meet growing demand in the domestic passenger vehicle market.
- Jaguar Land Rover will continue to achieve strong international growth. We expect emerging markets to provide significant opportunity.
Bears say
- Increased penetration by global OEMs in domestic passenger and commercial vehicles could result in market share deterioration.
- Stricter environmental laws and greater consumer preference for fuel-efficient vehicles entail higher research and development costs that make vehicles more expensive to produce and sell.
- Further passenger car market penetration is challenging since motorcycles are the predominant form of personal transportation in India.
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