4 Reasons to Love and Hate This Automaker

Tata Motors (TTM) is not your typical automaker. With everything from the newest Jaguar XF to the $2,500 Nano in its garage, investors can find it tricky to evaluate this India-based company. But never fear -- here's the scoop on Tata in four easy-to-understand categories.

Strengths

• Margins – Tata Motors consistently enjoys the highest margins in the business. Lower labor costs, cheaper commodity prices, and less competitive markets have allowed this Indian automaker to scrape all the fat off its goose. Here's a quick look at how it compares to competitors:

Source: e*trade.com

• Diversification -- Thanks to a 2008 Ford fire sale, Tata Motors bought Jaguar Land Rover on the cheap, and has been milking this cash cow ever since. In many ways, the company serves as a hedge against Tata's other offerings, appealing to different consumers around the world and across income levels. The company has also diversified its supply side, taking advantage of competitive advantages and international opportunities, wherever they may be.

Weaknesses

• Macroeconomic ties -- Despite its expansion and diversification, Tata still relies heavily on India's well-being to support both supply side operations and consumer demand. Its stand-alone sales dropped 4% last quarter, due in no small part to a sluggish India. Country-level economic health is notoriously hard to predict, and the national political atmosphere sheds even less light on forecasts.
• Amateur automaker -- Tata Motors has been around for fifty years, but its international expertise is fledging compared to the mega multinationals that it's competing against. The company may be biting off more than it can chew with recent expansions into South Africa, Indonesia, and elsewhere. 

Opportunities

• Commercial vehicles -- The company's claim to fame is the Tata Nano, the world's cheapest car. But Tata has recognized the vast potential for a new fleet of commercial vehicles to serve as the burros of developing country economies. Through strategic acquisitions in Thailand and South Korea, as well as a 1996 joint venture with American engine manufacturer Cummins (CMI 0.02%), Tata is gearing up for trucking domination.
• Emerging market luxury vehicles -- Toyota's Lexus has been capitalizing on this trend for decades, but the combination of Jaguar Land Rover's luxury brand with Tata's emerging market wherewithal has created a lean, mean, luxury machine. Jaguar Land Rover's quarterly sales are up 24% so far this year, with Land Rover retail sales up an astonishing 71% in China. With EBITDA margins at almost 15%, Tata keeps up to three times the amount of cash compared to its everyday offerings.

Threats

• Growing pains -- Tata is moving fast, stretching itself across the globe to establish partnerships and markets before others hit the ground. It hasn't ballooned its debt or felt any major flops yet, but that doesn't preclude it from expansion errors in the future.
• Competition -- Tata's success has caught the eye of multinationals, and each wants its own slice of the auto action. Tata enjoys a diverse consumer base but, generally speaking, it currently enjoys limited competition in almost every market it operates. As big boys like GM, Ford, and Toyota look to cash in on the global middle class and emerging markets, Tata could see its margins shrink and its customers disappear.

Foolish bottom line
Tata Motors has an impressive track record, and I believe its growth story is far from over. Its stock is pricier than the industry average, but its fat margins, minimal debt, and upside potential keep me long. Tata will have to work harder to maintain its market leads, but the company's cost-effectiveness and strategic decision-making give me confidence that this Indian automaker is ready for action.