Is Tata Motors a Good Buy?

Buying Indian ADRs may not seem like a good idea right now, given the currency crisis in India. However, there are some companies that have been benefiting from a sharp decline in the Indian rupee. One such company is automaker Tata Motors (NYSE: TTM  ) .

Now, a bullish sentiment on Tata Motors may surprise you. Its domestic operations have been hurt by the weak macro environment in India, as evidenced by the company's recently reported quarterly results. However, Tata Motors remains attractive right now for the performance of its Jaguar Land Rover unit, which accounted for a significant portion of the company's consolidated revenue in the June quarter.  In fact, Jaguar Land Rover's performance has more than offset the weakness in the company's Indian operations.

Weakness in domestic market offset by Jaguar Land Rover

The Indian economy grew just 4.4% in the June quarter, a sluggish performance that hurt consumer confidence.

Tata Motors' stand-alone business, which includes the Indian operations and exports, registered a 14% drop in June quarter revenue (based on $1 = 59.39 rupees). Total volume for the quarter was 154,352 units, down 19% on a year-over-year. The biggest drop came in the passenger vehicle business, with volume dropping 42.6%.

Despite the weak performance of the stand-alone business, Tata Motors' consolidated net revenue for the June quarter rose 8% year over year to $7.88 billion. This was mainly due to the strong performance of the Jaguar Land Rover unit. Net revenue at Jaguar Land Rover rose 12.6% year over year in the same quarter to GBP 4.098 billion (approximately $6.4 billion). EBITDA rose an impressive 28.3%. EBITDA margin improved 200 basis points.

Developed markets and China continue to show signs of improvement

Given that Jaguar Land Rover accounts for approximately 75% of the total net revenue at Tata Motors, the unit's performance going forward will be very crucial. Fortunately for Tata Motors, the outlook for Jaguar's main markets continues to improve. 

Tata Motors had noted in a report that Jaguar retail sales were up in all markets, with China remaining the company's largest market. At the beginning of the year, there were concerns that the Chinese economy would see a sharp slowdown. However, those concerns have been eased in recent weeks as the Chinese economy has shown signs of significant improvement. Earlier today, a report showed that the country's manufacturing sector stabilized in August, further signaling an improvement in the world's second-largest economy.

The other major market for Jaguar Land Rover is U.S. auto sales, which have continued to improve in 2013. In fact, U.S. automakers have seen their sales hit pre-financial-crisis levels.

Last month, Ford (NYSE: F  ) reported an 11% increase in U.S. sales for the month of July. In addition, Ford's retail sales rose an impressive 19%. Sales of Ford's F-Series rose 23% in the month of July. In fact, July was the best July sales month for the F-Series since 2006, according to Ford.

Likewise, General Motors (NYSE: GM  ) also saw impressive sales performance in July, with U.S. sales rising 16%. GM's retail sales increased 23%, while its passenger car sales rose 24% in the month of July. Chevrolet car sales rose 31%, driven by a record month for the Spark. The Cruze also registered record July sales. Cadillac car sales rose 34% in the month of July.

The premium car segment in the U.S. has also performed reasonably well. More importantly, Jaguar's share rose in the U.S. even though the market continues to be strongly competitive. 

Finally, the Eurozone has also shown signs of improvement in the last two months. This was further highlighted by the data released earlier today.

Overall, the economic environment in Jaguar Land Rover's main markets continues to improve. Therefore, we can expect the operational results to further improve from here.

Weak rupee provides further boost

A weak rupee provides further boost to Tata Motors's results, given that Jaguar Land Rover's net revenues are primarily generated from overseas. The outlook for the Indian rupee remains bearish in the near-term, with several analysts expecting the Indian currency to hit 70 rupees against the U.S. dollar. While this will not help Tata Motors's domestic operations, it will certainly boost its results from Jaguar Land Rover, and since the unit accounts for a significant portion of Tata Motors's revenue, it will more than offset the weakness in the Indian operations.

Valuation attractive

What makes Tata Motors even more attractive currently is valuation. The stock is only trading at a P/E ratio of 9.76. This is below the P/E ratio of U.S. automakers such as Ford (10.81), and General Motors (12.31).

Tata Motors shares have fallen more than 18% in the last three months, however, I think the pullback is an excellent buying opportunity, given the strong performance of Jaguar Land Rover.


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