Investment Focus: Tata Motors: Buy

A strong revival in its overseas sales, which is helping its product mix and profit margins, has sharply lifted Tata Motor's earnings in the latest December quarter. At the current market price of Rs 1,201, the stock is also among the most reasonably priced index constituents, trading at a PE of 8.5 times its trailing 12-month earnings.

For the nine months ended December 2010, consolidated revenues jumped 38 per cent year on year to Rs 87,522 crore, while the consolidated profits grew to Rs 6,636 crore from about Rs 350 crore. EBITDA margins have almost doubled to 15 per cent. This growth has been supported by the performance at JLR, thanks to its favourable product and market mix.

JLR strength

Wholesale volumes of Land Rover/Range Rover vehicles, in which the company enjoys greater pricing power, have grown 34 per cent during this period. Land rover vehicles now constitute 75 per cent of the volume mix. In terms of markets, too, the share of revenues from China, where profitability is the highest, has improved to 12 per cent in April- December 2010 from 7 per cent a year ago.

In these times of spiralling commodity prices, the healthy margins at JLR (16.5 per cent) is a function of the segment it caters to. JLR's focus on high-content, high-technology cars reduces its raw materials to sales proportion in comparison to Indian manufacturers. Besides, margin expansion has also been aided by variety reduction in materials, standardisation of parts across models and platforms, sourcing from low cost destinations (at 20 per cent currently) and reduced variable marketing expenses. Going forward, all these factors will continue to benefit JLR.

Domestic offerings

On the domestic front, although margins are under pressure, realisations are expected to receive a fillip from the redrawing of its passenger car offerings. The recent launch of the Aria, a crossover, the top-end Indigo Manza, the Venture MPV and the Winger Platinum (to take on the Innova and the Xylo) are pointers to this.

Besides, this focus on premium utility vehicles will help exports to Europe, where it readily has the JLR network to cash in on. The growing market for higher tonnage commercial vehicles (CVs) and the improving prospects for the infrastructure/construction industry lend promise to the Prima range of trucks.

Since Prima is part of the company's ‘world truck platform', opportunities for export to South Africa, Latin America and West Asia are also being tapped. A slowdown in JLR sales, adverse currency movements and moderation in domestic CV volumes due to higher interest rates remain risks to this recommendation.

BL Research Bureau