I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus -- hence this regular series. We'll be taking a closer look at many of the market's great growth stocks to see which of them show real, numerically relevant signs of sustainability.

Up today is Tata Motors (NYSE: TTM), a fast-growing Indian automaker that acquired luxury brands Jaguar and Land Rover from Ford (NYSE: F) two-and-a-half years ago. Ever since, Tata has struggled to turn top-line growth into consistent free cash flow.

Foolish facts


Tata Motors

CAPS stars (out of 5)


Total ratings


Percent bulls


Percent bears


Bullish pitches

458 out of 473

Highest rated peers

Komatsu Ltd., John Bean Technologies, IDEX Corp.

Data current as of Sept. 15.

Regardless, Fools believe Tata Motors will grow as India's infrastructure matures and gives rise to a wealthier, more mobile middle class. "I may be a little late on this bandwagon, but there's still room for growth especially if they start selling vehicles outside India, and if India's infrastructure improves enough to handle traffic," wrote Foolish investor BikeTheMtn recently.

Statistics support this argument. By volume, India is the world's seventh-largest automobile producer. Output increased 25% in the 2009-2010 fiscal year, according to data from the Society of Indian Automobile Manufacturers. And earlier today, The Wall Street Journal reported that Tata Motors' August sales rose 29% worldwide.

The elements of growth


Last 12 Months



Normalized net income growth

Not material

Not material

Not material

Revenue growth




Gross margin




Receivables growth

Not available



Shares outstanding

570.6 million

570.6 million

514 million

Source: Capital IQ, a division of Standard & Poor's.

Despite these favorable trends, the data in this table worries me. Let's review:

  • Revenue growth looks good, even if there's a lack of consistency. (Which, to be fair, may be due to integrating the Jaguar and Land Rover acquisitions.)
  • I'm much more concerned with receivables growth. When coupled with outsized inventory growth, it can signal trouble. Here, inventory growth far outpaced both receivables and revenue growth in fiscal 2009 before moderating in fiscal 2010, which ended in March. I'd like to see more progress when the next round of financial data is made available.
  • You'd think I would be concerned about the big spike in shares outstanding. And I would be, if this weren't explained by Tata's purchase of Jaguar and Land Rover.

Competitor and peer checkup


Normalized Net Income Growth (3 yrs.)

Ford Motor

Not material

Honda Motor (NYSE: HMC)


Nissan (Nasdaq: NSANY)


Tata Motors


Toyota Motor (NYSE: TM)


Sources: Capital IQ. Data current as of Sept. 15.

Finally, some encouraging data. Tata is the lone grower in an automobile industry that's been wrecked by the global economic crisis. I'd still like to see more consistent cash flows, but return on capital, at 11.7% over the past year, is back to 2008 levels. That's a good sign.

Grade = unsustainable
And yet I remain unconvinced. Tata Motors has the makings of what could one day become a Rule Breaker, but without consistent growth in cash flow and a numerically demonstrable competitive advantage, I don't see enough to bet on. This one's better suited for my CAPS watch list.

Now it's your turn to weigh in. Do you like Tata Motors at these levels? Would you make it one of our 11 o'clock stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 o'clock portfolio pick.

You can also ask Tim to evaluate a favorite growth story by sending him an email, or replying to him on Twitter.

For further Foolishness featuring Tata Motors:

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.