Tata Motors Hits a Speed Bump

Tata Motors (NYSE: TTM  ) has recently been making great strides to increase its presence as a global automotive player. It not only stole center stage at the Detroit and New Delhi auto shows by debuting its $2,500 Nano, but also captured the attention of auto industry analysts with its leading bid for Ford's (NYSE: F  ) Jaguar and Land Rover brands.

But despite Tata's revved-up outlook, the company's growth decelerated this past quarter, with revenue up just 5.2%. That stacks up against Tata's five-year compounded annual revenue growth rate of 32.6%. The bottom line benefited from a one-time gain from the sale of Tata's 11.1% stake in HV Axles, but that wasn't enough to offset surging raw material costs, and profits fell by 3%.

Export volumes increased 9.9%, while domestic total sales volumes stalled at just 1% growth, with commercial vehicles leading the domestic charge with 6.9% growth. Domestic passenger vehicle volume was down 7%, but Tata was able to maintain its No. 2 position in the segment.

Granted, India's growth has been exploding, so it's somewhat surprising that domestic volumes were lethargic. But with GDP projected to clock in at 8.5% in 2008, the Central Bank has had to consistently raise interest rates to help keep the brakes on inflation. Resulting rising interest rates on auto loans have crimped domestic demand.

The unveiling of the world's most affordable car has certainly put Tata in the spotlight, but it's also opened up an entirely new market that could quickly become littered with rival economical vehicles. Fellow auto giants Nissan (Nasdaq: NSANY  ) , Renault, Toyota (NYSE: TM  ) , and General Motors (NYSE: GM  ) have already expressed interest in creating their own low-cost cars to compete in the booming emerging market vehicle industry.

Still, the burgeoning middle class of India offers a wealth of growth potential. Just think: From 1900 to 1965, annual U.S. auto sales grew from 4,100 to 9.3 million. Even by 1965, the U.S. population of 195 million was barely one fifth of India's 1.1 billion today. The market is enormous, and despite the prospects of strong competition, Tata maintains an edge with its leading brand name in India.

Tata encountered some minor roadblocks this quarter, and current softening of the global economy may put a brake on near-term performance. But the company is steering itself in the right direction with its aggressive growth plans to make Tata a world-renowned brand in the long run.

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