Will India's New Government Boost Tata's Sales?

India is facing a new leadership. How will it impact Tata Motors and Direxion Daily India Bull 3X ETF?

Jun 5, 2014 at 7:15PM

The Indian stock market has been experiencing a gigantic rally over the last couple of months as it became clear that Indian nationalist Narendra Modi would become prime minister of the country. Well, the man just won the elections and reached single-party absolute majority in the parliament: 282 seats out of 543 total seats. Why are investors so excited about the new government, though?

Have a look at the year-to-date performance of the Direxion Daily India Bull 3X Shares (NYSEMKT:INDL) ETF, which seeks to amplify the performance of the benchmark Indus India Index by a multiple of three:
INDL Chart

INDL data by YCharts.

There are several reasons for the optimism. First, Modi is a strong supporter of growth and development -- and India needs plenty of both. New infrastructure investments should increase aggregate demand and drive businesses ahead. Second, the fact that Modi's party won by a landslide -- the biggest margin in 30 years -- will give him enough power to get things done. This may finally end the political paralysis that India has experienced in the past few years, which owes to the country's coalition politics. Regional parties have often blocked reform measures in an effort to serve their own narrow interests and agendas, but the path to change is now clear.

Analysts expect that the political reforms Modi will carry out could involve a fiscal belt-tightening, a reduction in corruption and bureaucracy, and lower inflation. This would improve the domestic business climate and boost investments. In fact, Morgan Stanley forecasts GDP growth to accelerate over the next eight quarters to 6.8%, with inflation heading toward a healthy 6% over the next two years.

Will Tata Motors grow?
This new period in India should definitely have an impact on one of its most emblematic companies, Tata Motors (NYSE:TTM). This industrial giant not only manufactures vehicles, but also operates in sectors that encompass steel and energy. Higher infrastructure spending and development levels should raise Tata's sales.

The market is clearly seeing improvements coming ahead. See how the company's stock price has rallied since mid-March:
TTM Chart

TTM data by YCharts.

Analyzing the third-quarter results, the biggest growth-driver for Tata has been its Jaguar Land Rover brands, which the company acquired from Ford in 2008. Jaguar remained the star, with retail volume growing 59% from Q3 2013 to Q3 2014, while Land Rover managed to grow a still-impressive 22%. China is Tata's biggest single market, now accounting for 25.6% of volume after the region's volume skyrocketed 46% year over year to lead all regions in growth.

Domestic sales of Tata-branded vehicles dropped 36%, however. According to the company itself, the prolonged slowdown in economic activity and subdued infrastructure activity are responsible for the weaker sales. The turnaround in Indian politics could reverse this trend and finally unlock domestic growth potential.

Bottom line
When it comes to investing in India, demographics are a key consideration. It is the second-most populous country in the world, and in the next 10 years it is set to deliver a quarter of the world's working-age population growth. The demand potential is tremendous.

Considering that international sales are showing good momentum, investors could be betting on future improvements in Tata's domestic market. Tata holds a 55.8% market share of commercial vehicles in the country and could easily profit from better market conditions. Let's not forget that India lags significantly compared to other big emerging markets in regard to the pace of urbanization and infrastructure growth. There's a lot to do, and if things get going as the new government promises, then Tata should feel it.

Turning back to macroeconomics, India has deficits all over the place: It has a GDP deficit of 4.6%, a large current account deficit, a heavy $200 billion-per-year trade deficit, and rapidly declining economic growth. With this in mind, it's likely that India will go through a lot of pain correcting these imbalances before we see major improvements in domestic aggregate demand that could improve vehicle sales. Similar reasoning can be applied to most India-related ETFs like Direxion Daily India Bull 3X: If the country does not keep up with expectations, we might see a correction ahead.

You can't afford to miss this
"Made in China" -- an all too familiar phrase. But not for much longer: There's a radical new technology out there, one that's already being employed by the U.S. Air Force, BMW and even Nike. Respected publications like The Economist have compared this disruptive invention to the steam engine and the printing press; Business Insider calls it "the next trillion dollar industry." Watch The Motley Fool's shocking video presentation to learn about the next great wave of technological innovation, one that will bring an end to "Made In China" for good. Click here!

Louie Grint has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information