Tata Motors (TTM +0.00%) stock is up double-digits after reporting end of fiscal year earnings on May 30. The company beat estimates for sales and profits in its last quarter from January through the end of March, led by strong sales and higher-than-expected profit margins. What is the company doing right, and can its run continue?
What happened last quarter
Total revenue for Tata Motors was up to 806.8 billion rupees ($12 billion), a 19% increase from the same quarter last year. The sales increases were led by commercial vehicles in the Tata Indian business, with year-over-year growth exceeding 26%, more than offsetting flat sales in passenger cars.
The Indian business was strong as a high rate of fleet replacement demand has propped up commercial vehicle sales. The Indian government launched a wave infrastructure improvements and spending this year, and Tata's construction vehicles have benefited from those initiatives.
Image source: Tata Motors.
Jaguar Land Rover sales were also strong. In the last year, the luxury brands struggled with falling sales and profits. That trend has started to reverse, as revenue and profits for the brand increased over 13% and 56%, respectively.
Mainland Europe played an especially large factor in the rebound, with sales of Jaguar Land Rover increasing 55%. Overall, the luxury vehicle brands rode a tidal wave of increased global spending on vehicles during the first three months of 2016. North America sales increased 24%, Great Britain increased 23%, and China was up 19%.
Expectations for next quarter
The next quarter to be reported starts a new fiscal year for Tata Motors. So far, the company is off to a good start. April and May reported sales remained on the same upward trajectory seen earlier in the year.
For the Tata division, exports were flat in April and down 5% in May, but that was more than offset by domestic Indian sales increases of 10% and 2% in April and May. Total sales growth over the first two months of the new fiscal year are up 5% from last year. Jaguar Land Rover sales in April were up 11% year over year. As of this writing, Jaguar Land Rover had not yet released May's figures.
For the coming year, Tata Motors has a slew of new releases that the company hopes will prop up sales. The Indian business expects demand to stay strong for commercial and construction vehicles as the Indian government continues to invest in infrastructure development. New passenger vehicles, the Tata Tiago hatchback and HEXA and NEXON sedans, will be released this year with the hope of revitalizing that flat segment of business last year. The Indian business has stated making export growth a focus in the new fiscal year to help boost sales.
Jaguar Land Rover is similarly going into a year with a number of new model releases. To support the new launches, company management announced a 17% increase in investment spending for the coming fiscal year. New product launches include Jaguar's foray into the SUV world with the F-PACE model, as well as a convertible Land Rover Evoque SUV. Two models were introduced to China in recent months, and a third is slated for launch later this summer. Tata expects the new models to keep recent momentum going and propel sales higher.
Jaguar's new F-PACE utility vehicle. Image source: Jaguar.
Investor takeaway
Despite strong quarterly results and the corresponding jump in its share price, I think Tata Motors has more room to run. The new fiscal year is off to a strong start with the sales figures continuing to trend higher, and the company's export business is starting to turn the corner after struggling the previous year.
Underpinning the pipeline of new model releases is the Indian government's expanding budget supporting infrastructure and road building. The company has benefited with booming sales of its commercial vehicles, and so far the sales rate has continued higher. India's economy overall has been a standout in emerging markets, and that trend also bodes well for the country's largest auto manufacturer.
More than a short-term growth streak, I believe Tata Motors is still a great buy. Profits are expected to grow at a 20% annual rate for the next five years, putting its PEG (Price-to-earnings growth) ratio currently at 0.4. A PEG of 1.0 indicates a company to be fairly valued, and anything less could be considered undervalued. Considering the momentum and pipeline for growth the company has, Tata Motors is worth investors' consideration.
