(Source: www.tatamotors.com, www.myiris.com)
Recommendation: HOLD (BUY below 15 US$)
Sector: Auto Manufacturing
Home Country: India
Listed On: Bombay Stock Exchange & National Stock Exchange, Mumbai
Data provided are consolidated Indian GAAP numbers in US$, if not indicated otherwise.
Total Revenue FY 2006: 6.16 bln US$
Net Income FY 2006: 390,6 mln US$
Debt/Equity Ratio 2006: 0.35
Market Capitalization: 6.97 bln US$
Share Price May 19th, 2006 (ADS at NYSE): 18.20 US$
Expected Earnings per share FY:
2006 : 1.04 US$
2007 : 1.25 US$
2008 : 1.44 US$
2009 : 1.65 US$
Expected Price/Earnings Ratio FY: (expected EPS to current market price)
2006: 17.5
2007: 14.6
2008: 12.7
2009: 11.0
Dividend yield 2006: 1.3%
Estimated reasonable P/E ratio 2008: 16
Target Share Price 2008: 26.41 US$
(representing an increase of 45.1% compared to current market price)
Exchange rate as of May 16th, 2006: 45.44 Rs. for the US$
Company Profile
Tata Motors Limited is India's largest commercial vehicle (CVs) manufacturer, with a domestic market share of 61.3% in FY06 and second largest producer of passenger vehicles with a domestic market share of 16.5%. Its plants are located at Pune, Jamshedpur and Lucknow. Tata Motors has acquired the CV division of South Korean auto major Daewoo and this is likely to help the company to augment growth in the higher tonnage CVs, an area that holds considerable promise in the future. Similarly, company has also acquired a 21% stake in Hispano, a Spanish company, with an option to acquire the rest later.
The company's commercial and passenger vehicles are already being marketed in several countries in Europe, Africa, the Middle East, Australia, South East Asia and South Asia. It has assembly operations in Malaysia, Kenya, Bangladesh, Spain, Ukraine, Russia and Senegal.
Through its subsidiaries, the company is engaged in engineering and automotive solutions, construction equipment manufacturing, automotive vehicle components manufacturing and supply chain activities, machine tools and factory automation solutions, high-precision tooling and plastic and electronic components for automotive and computer applications, and automotive retailing and service operations.
Analysis
Tata Motors has been able to increase the volume of vehicles sold during the financial year 2006 by 13.7% compared to the prior year. The increase for commercial vehicles has been 13.1%, for passenger vehicles 5.6%, and exports have increased by 64.7% to reach 50,223 units. Revenues in the FY 2006 have increased by 18.3% and the operating profit increased by 18.8% compared to the prior year. The operating margin remained about the same at 12.5%. Tata Motors was able to increase the profit after tax by 23.6%.
With the acquisitions Tata Motors has performed, the launch of new models and the international expansion it is pursuing, Tata Motors should be able to grow its revenues and net income between 15-20% annually. Risks remain, as the auto industry is traditionally cyclical and with the market entrance of other manufacturers in india it will be difficult to maintain its relatively high operating margin of 12.5%. However Tata Motor still enjoys a competitive cost advantage compared to the global car companies and therefore should be able to grow its exports from india.
Valuation
On the basis of the arguments stated above we arrive at our EPS estimates for the coming years, which represent a growth rate between 15 and 20%. The P/E ratio of 16 which we consider reasonable for the medium term, is significantly higher than that of other volume car makers, which usually trade at multiples between 10 and 14. With our P/E ratio of 16 we have taken into account Tata Motors growth rates, which are above the global market average, as the indian commercial and passenger car market is growing faster than the overall market and Tata Motors is also expanding its exports.
When we multiply our EPS estimate of 1.65US$ for the FY 2009 with our estimate of a reasonable P/E ratio of 16, we arrive at our target share price of 26.41 US$ for the year 2008. As this represents an increase of 45.1% compared to the actual share price, we put a HOLD recommendation on the stock. In case of a temporary correction in the indian stock market, during which Tata Motors might fall below US$ 15.0, we would change our recommendation to BUY.