Tata Motors Limited (ADR) (TTM)

Warrior777 (31.08) Submitted: 11/22/07 9:14 PM : Start Price: $16.90 TTM Score: -26.89

Tata Motors is India's largest vehicle producer. The company designs, manufactures, and finances vehicles in both the passenger and commercial segments. At current prices, Tata is slightly higher than its 52 week low and is therefore worth a closer look given the company's quality reputation.

In the commercial vehicle segment Tata is the dominant player in India. Recent studies peg Tata as controlling a monster 78% of the medium duty truck & bus market as well as 64% of the heavy duty truck & market. The company holds its own in the passenger segment as it is India's second largest player in this category with a 16% market share. Although it has taken significant business away from leader Maruti, the passenger segment is significantly more competitive than the commercial area. Thus far, Tata's long operating history and significant commercial operating experience have helped the company successfully navigate personal auto market.

Despite the company's strong positioning in automotive market it still faces significant risk. Almost all of the major global car manufacturers have entered the Indian market (or will be entering the market in the near future). Although Indian does have a population greater than $1 billion, competition in the passenger market will be fierce. The good news for Tata is that it has established itself as a strong and reliable brand among consumers and this should help it compete with multinational rivals. The commercial market is not without risk either. Over the years this area has proven to be very cyclical and a dip in revenues here combined with problems in the passenger segment could significantly hurt the company. Finally, the automotive industry is a notoriously difficult sector to operating in. We all know the troubles of the Big 3 in America and recently even highly praised Toyota has stumbled.

Financially, Tata has performed extremely well in recent years. Its operating margins (10%) are slightly better than well respected global giants Honda (8%) and Toyota (9%). Additionally, the company's revenue has grown at 35% annually over the last 5 years due to the high demand for cars in India. Tata's also earns high praise for its strong ROE 21% (industry average is 9.4%) and high return on invested capital (13.8%). Again only Honda and Toyota are "close" when comparing these metrics. Both companies sport ROE's of 15% and ROIC's of 8%. These numbers are a testament to Tata's operating strength. Tata's debt to equity ratio is in line with the industry average and the company has $250 million in cash listed on its balance sheet. One negative for the company though lies in its free cash flow generation, which has been negative in recent years.

Insiders own nearly 34% of Tata and control much of the company's voting rights. This is not of concern however, as the company has been operating successfully for decades under this structure. The Tata family is still involved in many areas of the company's operations.

One final note to consider. The company has made a large bet on its $2,500 car which will be released in the near future. If successful Tata stands to capture significant market share from people who can only afford a low priced passenger vehicle. However, several questions remain about the potential profitability of the vehicle, its reliability, safety, and whether or not it will truly be able to succeed in the face of intense competition of larger car manufacturers.

Given all this the company seems to be undervalued at its current price. Tata's PEG of .6 and P/E of 11 seem to back this up especially given its market opportunity. Tata seems to be in a position to outperform over the next year or two. Overall though, investors should keep a close eye on the company for the time frame above and especially beyond that. The increased competition which the company faces may have a significant impact on the company's future and must be kept track of.

As always do your own research before investing and do not consider this a formal buy recommendation.

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