The Hindu Business Line : Tata Motors: Hold

THE TATA Motors stock (current market price Rs 643) has run up sharply in the last few weeks and appears fully valued at present levels. However, shareholders can continue to hold the stock with a medium-term perspective, as there is likely to be a steady flow of positive information from the company over the next year. Investors can consider acquiring the stock with a medium- to long-term perspective at declines from current levels linked to the broad market.

The only risk to our recommendation stems from the possibility of the core business of commercial vehicles failing to gather the expected momentum over the next six months. The probability of this happening, though, appears low at the moment given the boom in the overall economy, including agriculture.

Unlocking of value in subsidiaries

The recent appreciation in the stock appears linked to Tata Motors' plans for its subsidiaries such as Telco Construction Equipment Company (Telcon), Tata Technologies, HV Axles and HV Transmissions. While joint venture partner, Hitachi, has doubled its stake in Telcon to 40 per cent, Tata Technologies has been on a roll acquiring a UK design services firm, Incat Technologies for Rs 411 crore, which in turn has now acquired a German automotive engineering and design firm.

Tata Motors is also actively seeking partners for HV Axles and HV Transmissions and hopes to sew up a deal before the end of this fiscal. These moves are set to unlock value in subsidiaries. The sale of 20-per cent equity to Hitachi in Telcon fetched the company $44.25 million (approximately Rs 200 crore) and this should be reflected in the third-quarter earnings. The Incat (turnover of approximately Rs 800 crore) acquisition should transform the financials of Tata Technologies, which has not had a good period in the current fiscal. Tata Motors has not ruled out an IPO of Tata Technologies within the next couple of years once the integration process with Incat is complete and the company grows its business further. Similarly, an IPO of Telcon is also a possibility in the same time frame. These moves should unlock hidden value of Tata Motors' holdings in these companies.

Growing international business

A significant feature of Tata Motors' business in the last two years has been its increasing international profile. Daewoo's commercial vehicles plant in Korea and Hispano Carrocera's bus business in Spain have been assimilated well into Tata Motors. The company has also been successful in the South African market for commercial vehicles as also in Turkey and West Asia. International business, including exports, accounted for 18 per cent of revenues in the second quarter and is set to grow further in the coming year. The growing share of international business would act as a buffer protecting the company from business cycles in the domestic market.

Ace's success

The tremendous response to the sub-1 tonne Ace launched in May last has helped the company maintain its commercial vehicle sales in the first nine months of this fiscal. The Ace has compensated for the drop in sales of heavy commercial vehicles and, significantly, it has not been introduced countrywide yet. Tata Motors has already started work on doubling its capacity for the Ace to 60,000 units by the end of this calendar year. Besides, the company is also extending the concept to passenger carriers in a bid to exploit what it sees as a gap in intra-city people movers of small, stable vehicles. We could well see a launch of such a vehicle in the next one year from the company.

Recovery in HCV market?

Tata Motors' sales of heavy commercial vehicles fell 8 per cent in the April-December 2005 period. Even assuming that the traditional pick-up in sales in the fourth quarter happens again this year, the company may at best end up with a flat growth for 2005-06.

While there is indeed a near-term worry on this count, the long-term growth prospects appear excellent given the overall buoyant economic scenario. With a bountiful monsoon in 2005 and reservoir levels at 10-year highs, prospects appear bright indeed for the agricultural sector.

Industry, specifically the construction sector, is booming, too, and for the first time in some years we could see agriculture and industry booming simultaneously in 2007.

This, along with the hardening trend in freight rates, augurs well for CV sales in the coming fiscal. The upward revision in commercial vehicle prices by between 2-2.5 per cent in December last should help the company recover higher input costs though the impact of this move may be felt fully only in the next fiscal.

Cars, a worry

The increasingly competitive passenger car market with its minute segmentation is something that Tata Motors must be worried about. The Indica and Indigo bounced back in December after indifferent performances in the previous months but it remains to be seen if this is sustained. The market is rampant with price-competitive practices such as discounting and Tata Motors has fallen victim to that in the past. Besides, the advent of new models such as the Swift, with fresh and radically new designs, has made the Indica look old. The risk of model fatigue setting in soon is high and Tata Motors may have to crash its time frame for the next model from its stable. Besides, the diesel car advantage that the company now enjoys in the B-segment will soon be lost when Maruti enters the market by the end of this year with its own diesel engine alternatives.

In this backdrop, the dealership-sharing alliance with Fiat announced on Friday is cause for optimism especially because it has the potential of growing into a larger partnership. A possible manufacturing alliance at the next stage could well make the Fiat-Tata alliance a formidable one in the Indian market.

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