Tata Motors Equity Research

Date of Research- 12-01-2016

Price- Rs. 356.70

About the Company

Tata Motors Limited (“Tata Motors” or the “Company”) is among the largest automobile manufacturing companies in the world by volume, and has presence across a range of passenger and commercial vehicles.

STRENGTHS

Dominant Market Position

Tata Motors is the largest automobile manufacturing company in the world by volume, with presence across a range of passenger cars and Commercial Vehicles (CV). It is the market leader in terms of volumes in CV Segment (including, Light Commercial Vehicles + Medium & Heavy Commercial Vehicles segments) and enjoys market share of ~ 58% in CV segment which has grown consistently over the last few years.

Rural Market Penetration

Tata Motors has been focusing on improving the mix of its products and markets. In India, future growth is expected to be driven largely in tier 2 and tier 3 cities. With growing rural affluence and broader connectivity, the Indian automobile industry will benefit from an increased demand in rural areas.

New Product launches Tata Motors is planning to launch a series of passenger cars (hatchback, sedan and sport utility) vehicle until FY2020 to increase its market share and has plans to launch two new cars every year.

CHALLENGES

Intense Competition Competition in the automobile industry is likely to further intensify in view of the continuing globalization and consolidation in the worldwide automotive industry. On the domestic front, Tata Motors competes primarily against Maruti Suzuki India Limited, Mahindra & Mahindra, Ashok Leyland, Hyundai Motors India and Force Motors. The competition within the industry is increasing further with new players entering the market and some smaller players catching up.

Dependent on Jaguar Land Rover Jaguar Land Rover contributes a large portion of the Company’s consolidated revenues. A decline in demand for Jaguar Land Rover vehicles in its major markets, including North America, China, or inability to maintain its pricing strategy, may significantly impact the company’s business and financial position.

Volatile Input Prices Volatile commodity prices, including steel, aluminium, copper, zinc, rubber, could impact company’s profitability.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations1,88,817.632,32,833.662,62,796.332,75,561.11 2,74,492.12 
Expenses1,64,270.331,97,995.962,23,557.682,38,804.88 2,44,903.43  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)24,547.3034,837.7039,238.6536,756.23 29,588.69  
Depreciation7,569.3011,078.1613,388.6317,014.18 17,904.99  
Finance Costs3,553.344,733.784,861.494,623.35 4,238.01  
Other income811.53828.59898.74981.72 754.54  
Exceptional items602.71985.38184.712,119.55 (1,114.56) 
PBT13,633.4818,868.9721,702.5613,980.87 9,314.79  
Tax3,770.994,764.797,642.912,872.60 3,251.23  
PAT (before Minority Interest and share of Associates)9,862.4914,104.1814,059.6511,108.27 6,063.56  
Profit/ (loss) attributable to Minority Interest83.6759.4586.78105.86 – 
Share of profit / (loss) of Associates(113.79)53.71(13.42)(21.34) (1,493.00) 
Consolidated Profit / (Loss) for the year9,892.6113,991.0213,986.2911,023.75 7,556.56  

Profitability Analysis

Consolidated(%)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Operating Profit Margin Ratio13.0014.9614.9313.34 10.78 
Net Profit Margin Ratio5.226.065.354.03 2.21 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Share Capital634.75638.07643.78643.78679.18 
Reserves & Surplus32,515.1836,999.2364,959.6755,618.1480,103.49
Net worth (shareholders funds)33,149.9337,637.3065,603.4556,261.9280,782.67
Minority Interest307.13370.48420.65433.34888.26
Long term borrowings27,962.4832,110.0745,258.6156,071.3451,876.31
Current liabilities73,268.0786,285.9092,356.131,00,272.001,10,820.46
Other long term liabilities and provisions8,529.968,319.1514,787.1524,276.1921,763.82 
Deferred Tax Liabilities2,165.072,019.491,572.331,343.203,166.08
Total Liabilities1,45,382.641,70,026.452,19,998.322,38,657.992,69,297.60 

 

Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Fixed Assets56,212.5069,483.6197,375.401,12,422.59128,850.67
Noncurrent Investments1,391.541,515.401,114.391,240.501,253.15
Current assets64,461.4774,006.7395,845.331,01,758.401,15,315.13
Long term advances and other noncurrent assets14,684.0615,465.4618,337.2915,806.31 16,315.70
Deferred Tax Assets4,539.334,428.932,347.082,733.202,726.43
Goodwill on consolidation (net)4,093.744,102.374,978.834,696.994,836.52
Total assets1,45,382.641,70,026.452,19,998.322,38,657.992,69,297.60

Efficiency Analysis

 (%)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
ROCE36.3335.0131.3134.8027.52 
ROE / RONW40.7726.2821.3324.8613.75 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations (Rs. Cr.)1,88,817.632,32,833.662,62,796.332,75,561.11 2,74,492.12 
Growth (%)13.98 %23.31 %12.87 %4.86 % (0.39 %) 
PAT (Rs. Cr.)9,862.4914,104.1814,059.6511,108.27 6,063.56  
Growth (%)(27.34 %)43.01 %(0.32 %)(20.99 %) (45.41%) 
Earnings Per Share – Basic (Rs. )31.0243.6143.4432.71 22.04 
Earning Per Share – Diluted (Rs. )30.9443.6043.4332.70 22.03 
Price to Earnings8.709.6610.8611.81 21.77 

Dividend History

The Company has maintained an average dividend yield of 0.98 % over the last 5 financial year.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Tata Motor’s average current ratio over the last 5 financial years has been 0.97 times.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Tata Motor’s average long term debt to equity ratio over the last 5 financial years has been 0.80 times which indicates that the Company is able to withstand any economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Tata Motor’s average interest coverage ratio over the last 5 financial years has been 7.55 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Tata Motors reported a promoter holding of 34.73 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 39.16 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.