Tata Motors Ltd. (TTM, Financial) is India’s largest automobile manufacturer and the world’s fifth-largest medium and heavy commercial vehicle manufacturer and second-largest medium- and heavy-bus manufacturer. It also generates close to 40% of the revenue for the Tata Group.
On paper, Tata motors looks great.
High return on equity (22%), growth in EPS (394% over 10 years), growth in Book Value (351% over 10 years), and a forward price multiple under 10. From a car company perspective, this looks very attractive. General Motors (GM) and Ford (F, Financial) carry much higher valuations and far lower capital efficiencies.
Ken Fisher (Trades, Portfolio) increased his shares from 5,749,930 to 6,945,478 or 1.36% of the float over the last quarter as the price fell. Fisher funds are massive, so this position takes up less than 1% of the total assets, but for the average investor it could be a great investment –Â a play on the industry away from following Warren Buffett into GM.
With TTM, he has the right premise and a good price, but buying in now gets you the stock at a 13% from Fisher’s entry point.
Tata Motors recently announced the terms of a proposed rights issue with proceeds from the issue to be about $1.2 billion diluting the equity 5% or 177 million shares. Now that this is priced in, the $41 price looks deeply discounted.
Tata’s gross margins are 38%, 4 times higher than GM’s. And, in the last decade they’ve documented earnings in 9 out of the 10 years, generating $10.79 billion in retained earnings.
Tata Motors benefits from substantial profitability and returns generated by its premium brands: Jaguar, and Land Rover. Since 2010, this segment has grown at 40% per year accounting for 43% of Tata’s total sales last year and 103% of pre-tax earnings. This was a good pickup for the company as both brands have garnered plenty of attention for the new vehicle looks.
The bottom line
$25 billion market cap and an EPS of $4.41 to go with the high gross margins and return on equity make the company a winner over the long term. They are obviously run by the right people and are in a strong position to move up the rankings for global auto makers. The rights offering should allow the company to reduce the debt on its balance sheet to a net debt of about 32%.
I always look for investment grade stocks to have a baseline of 100% growth during any 5 year period. That would put TTM at $82.36 per share by 2020. Given the global demand for autos, the reduced oil prices, and gurus heavily invested in companies like GM and F at worse valuations, TTM looks like a good trade.
