Is India's Largest Automaker Worth Your Investment?

As far as investments in the automotive industry go, the discussion is usually concentrated on companies of German, Japanese, or American origin. There is good reason for this, many of the world's most respectable manufacturers of automobiles hail from those countries. But I would like to divert attention to a lesser known name in the automotive industry: Tata Motors (TTM), India's largest automaker by revenue. 

Operations breakdown
The automotive operations of Tata Motors are divided into two groups: the Tata brands and other vehicles group, and the Jaguar Land Rover, or JLR, group. Most of the vehicles the company sells, roughly 70%, are from the Tata brands and other vehicles group. However, the JLR group, which sells luxury automobiles, unsurprisingly accounts for a much larger portion of the company's overall sales. For the six-month period ended Sept. 30, 2013, JLR accounted for 78.25% of the company's total sales .

Disappointing domestic performance
The company's sales in its domestic market declined significantly in 2013, falling 33.2% year over year. While the company has maintained its market-leading position in commercial vehicles, its market share in four-wheel consumer vehicles fell to 22% in 2013 from 24.3% in 2011. The company's efforts to entice customers with low-priced vehicles haven't been very effective. Sales of its Nano cars, the cheapest vehicle in the world, declined by 37.8% in 2013. 

The environmentally conscious people of India prefer diesel vehicles, one reason the company cites as a contributor to its slumping domestic sales. Steps are being taken to address this weakness, a Nano model with a diesel engine will be revealed in February . But it is far from certain that this new release will be enough to reverse the fortunes of the ailing Tata Nano brand.

It should be noted that the company's domestic operations and its Tata brands and other vehicles group are practically one in the same. Over 90% of the sales from that group occur in India. On the other hand, less than 1% of JLR sales occur inside India . However the fact that the vast majority of Indian people cannot afford a Jag hasn't stopped JLR from being massively successful. 

Succeeding where Ford failed
The performance of Ford's (F 0.33%) premier automotive group in the middle of the last decade was absolutely horrible. After it lost the company billions in each year between 2005 and 2007, the division was dismantled. Part of that dissolution involved selling the JLR business to Tata Motors for hundreds of millions less than Ford had originally paid for it. Considering JLR's outstanding performance in recent years, Ford might regret not holding on to such a valuable asset.

Since 2011, revenues from the JLR operation have increased by 78% and net income has risen by 43.3%. During the 12-month period that ended on Sept. 30, 2013, JLR generated $2.45 billion in net income for Tata Motors. That's more than the entire amount the company paid Ford for JLR in the first place!

Sales of Land Rovers accounted for 84.5% of all JLR sales in 2013. Additionally, sales of Land Rovers are growing much faster than sales of Jaguars. Between 2011 and 2013, Land Rover grew by 67.1%, while Jaguar's growth during the same time is only 13.1%. Although the fact that JLR's growth is being driven primarily by the Land Rover marquee is unlikely to illicit complaints from Tata shareholders. 

Impressive performance in China
Additionally, JLR is succeeding spectacularly in China. The luxury market in that country is widely perceived to be dominated by the "big three" from Germany: Audi, BMW, and Mercedes-Benz. But, as the following table shows, that isn't entirely true.

Unit sales are for China only. Source: company and government reports.

Audi is clearly the best-selling luxury car brand in China. That being said, JLR grew its sales at a faster rate than any of the three big German carmakers. Starting from a much lower base level undoubtedly made that feat much easier. Nonetheless, JLR's success in China is a promising sign for Tata shareholders.

Foolish final thoughts
To those investors interested in buying an automaker, I suggest giving serious consideration to India's largest automaker. The company's domestic operations aren't delivering spectacular results, but they are at least still profitable.

Purchasing Tata Motors is really more of a bet on the future success of the Jaguar Land Rover operation, which accounts for the lion's share of the company's profits. Given JLR's ability to successfully compete against the German "big three" in China, that doesn't seem like a bad bet to make. And the fact that the company also holds a strong position in one of the world's largest and fastest-growing economies is icing on the cake.