Introduction
Tata Motors (TTM) is the biggest company of India’s biggest business conglomerate – the Tata Group. Tata Motors is also India’s largest automobile company, with consolidated revenues of $32.5 billion in 2011. Tata Motors started out as commercial vehicle producer in India, but diversified into the passenger vehicle segment over the last decade. The company made global media headiness, when it launched the “world’s cheapest car” Nano (dream project of Ratan Tata). In 2008, Tata Motors made an entry into the global auto big league by acquiring the premium British brands – Jaguar and Land Rover.
How Tata Motors is a great buy
Tata Motors is a good buy mainly due to
a) JLR showing a solid turnaround especially in emerging markets like China
b) Cyclical Bottom in its domestic Indian market.
What makes the company a great buy is Tata Motor’s DVR stock, which trades in India at a 40-70% discount to its normal stock.
Why Buy Tata Motors
1. Jagaur Land Rover (JLR) showing strong sales momentum – During the 2007-08 boom, many Indian business groups went on an aggressive acquisition spree. Suzlon bought Repower and Hansen; Hindalco bought Novelis and Tata Motors bought JLR. Tata Motor’s acquisition has turned out to be the best amongst these large overseas buys. In 2012 (YTD), JLR has sold 324,000 vehicles which is up a stunning 32% (year on year), with a strong showing across geographies (China – up 43% year on year).
2. Bet on the Indian Growth Story – Last year’s performance of the Indian passenger vehicle market has been quite tepid compared to the preceding five years. On top of this, competition has been increasing rapidly as every global car major has launched Indian operations. However, there are indications that the policy paralysis of the Indian government is ending and new reform measures are being implemented (FDI in retail etc.). The GDP growth which has gone down to 5%, should start to look up again as the interest rate cycle turns favorable. While Tata Motors has not been too successful in India’s PV market, it can make a strong comeback soon. With India’s GDP growing again, Tata Motors bread and butter CV segment should also start showing good volume growth.
3. Good Management – The Tata Group is one of the best managed business groups in India. The Tata brand name is synonymous with trust and quality (not an easy thing where most Indian companies’ managements are looked at with suspicion). The group’s chairman Ratan Tata retired recently, passing on the baton to Cyrus Mistry who belongs to the family of Pallonji Mistry (largest stake owner in the Tata Group).
Valuation equal to other Global Auto Majors but Growth prospects are Better
Tata Motors has managed to steadily decrease its Debt/Equity ratio to 0.43 from 0.96 in 2008 (when it bought JLR). The company’s P/E at 7.8 and P/S at 0.5 is pretty much the average for the global automobile industry. This means the group’s higher growth potential at average valuation makes it an attractive buy.
Now the Clincher – How to Buy Tata Motors at a ~ 50% discount
Tata Motors ADRs are listed on the US Stock Exchange; however the best way to buy Tata Motors is through Tata Motors DVR. In India, Tata Motors Differential Voting Rights (DVR) shares trade at a substantial discount (between 40-70%) to its ordinary shares. The DVR shares have 1/10th the voting rights but get 5% more dividend than the normal stock. In the US, the normal discount for DVR stock is around 2-3%. Also unlike other DVR stocks, Tata Motors DVR stock is highly liquid and trades on the future segment on NSE.
Reason for DVR discount
Tata Motors DVR were initially issued at a 10.3% discount by the management during a rights issue. However the issue failed to get subscribed and the promoters had to buy a most of the stock on offer. The promoters have been releasing the stock in the market slowly and most of their inventory has now been sold. We expect that this discount will eventually dissipate leading to a massive upside.
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