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    One Stock That Will Repeat History and Turn Multibagger: 30 December 2008

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    Pradeep Magudeswaran
    This document profiles Tata Motors as a stock that will repeat its history of surviving economic downturns and becoming a multibagger investment. It notes that while the auto sector is facing headwinds, Tata Motors' growth story remains intact due to its strong product lineup catering to latent demand. The document predicts that Tata Motors' total volume sales will grow at an 8.5% CAGR between FY09-FY11, driven by new launches and its distribution network. It also notes that the newly launched Nano car could contribute up to 6% of total net sales by FY11. Additionally, the recent acquisition of Jaguar and Land Rover brands is expected to benefit Tata Motors techn

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    One Stock That Will Repeat History and Turn Multibagger: 30 December 2008

    Uploaded by

    Pradeep Magudeswaran
    97 views6 pages
    This document profiles Tata Motors as a stock that will repeat its history of surviving economic downturns and becoming a multibagger investment. It notes that while the auto sector is facing headwinds, Tata Motors' growth story remains intact due to its strong product lineup catering to latent demand. The document predicts that Tata Motors' total volume sales will grow at an 8.5% CAGR between FY09-FY11, driven by new launches and its distribution network. It also notes that the newly launched Nano car could contribute up to 6% of total net sales by FY11. Additionally, the recent acquisition of Jaguar and Land Rover brands is expected to benefit Tata Motors techn

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    This document profiles Tata Motors as a stock that will repeat its history of surviving economic downturns and becoming a multibagger investment. It notes that while the auto sector is facing headwinds, Tata Motors' growth story remains intact due to its strong product lineup catering to latent demand. The document predicts that Tata Motors' total volume sales will grow at an 8.5% CAGR between FY09-FY11, driven by new launches and its distribution network. It also notes that the newly launched Nano car could contribute up to 6% of total net sales by FY11. Additionally, the recent acquisition of Jaguar and Land Rover brands is expected to benefit Tata Motors techn

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    97 views6 pages

    One Stock That Will Repeat History and Turn Multibagger: 30 December 2008

    Uploaded by

    Pradeep Magudeswaran
    This document profiles Tata Motors as a stock that will repeat its history of surviving economic downturns and becoming a multibagger investment. It notes that while the auto sector is facing headwinds, Tata Motors' growth story remains intact due to its strong product lineup catering to latent demand. The document predicts that Tata Motors' total volume sales will grow at an 8.5% CAGR between FY09-FY11, driven by new launches and its distribution network. It also notes that the newly launched Nano car could contribute up to 6% of total net sales by FY11. Additionally, the recent acquisition of Jaguar and Land Rover brands is expected to benefit Tata Motors techn

    Copyright:

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    of 6

    One Stock That Will

    Repeat History…
    And Turn Multibagger

    30th December 2008

    Powered by:

    This Report is Exclusively for Subscribers to


    Equitymaster’s StockSelect Service
    Equitymaster Agora Research Private Limited
    One Stock That Will Repeat History And
    15, Khetan Bhavan, 198, J Tata Road, Churchgate, Mumbai-20
    Tel: (91-22) 6631-4055 Fax: (91-22) 2202-8550 Turn Multibagger

    Report date: 30th December 2008

    Index
    Investment Summary………………………………………………………………………………………. 3
    Tata Motors.…………………………………………………………………………………………………. 4

    www.equitymaster.com Page 2
    Equitymaster Agora Research Private Limited
    One Stock That Will Repeat History And
    15, Khetan Bhavan, 198, J Tata Road, Churchgate, Mumbai-20
    Tel: (91-22) 6631-4055 Fax: (91-22) 2202-8550 Turn Multibagger

    Report date: 30th December 2008

    Investment Summary
    In the aftermath of credit and housing bubble burst, the world is dealing with corporate bankruptcies. And India is
    no exception. While we have not heard of any big bankruptcy in the country since the crisis unfolded, hundreds of
    small companies have died down. And no one has blinked an eye!

    Now, some of the large Indian corporations are staring at a similar fate – bankruptcy, going down under. Pressed
    by slowdown in consumption demand on the back of rising interest rates, job losses and reduced disposable
    income, even some large companies are finding it difficult to sustain business and are looking to cut corners.
    Then there is the usual burden of high and expensive debt on the balance sheet.

    In short, some large Indian companies are ‘said to be’ on the verge bankruptcy. We heard similar stories of
    ‘possible bankruptcies’ in the early part of this decade as well. While some really went down, there were others
    that were just sufferers of a broad economic slowdown. Out of this latter group, some were backed by excellent
    management teams and sound business models.

    But since the headwinds were strong, everyone thought that that was ‘the last time’.

    The rest, as they say, is history. These companies not only survived the downturn, but also emerged stronger.
    Having learnt the survival lesson the hard way, these companies had more vibrancy in their steps.

    After five years or so of robust economic growth, India again finds herself amidst a slowing economy and decline
    in consumption demand. And you know what? Some companies are again touted as – ‘about to go bankrupt’.

    In the report that is attached, we profile one such company that is said to ‘go bankrupt’. This company has, in fact,
    lived through such times in the past and has survived and grown strongly. With a strong latent demand for its
    products, this company is set to tide over the troubled times. We expect its stock to subsequently deliver you
    stupendous returns over the next 2 to 3 years.

    Happy investing!
    Team Equitymaster

    www.equitymaster.com Page 3
    Equitymaster Agora Research Private Limited
    One Stock That Will Repeat History And
    15, Khetan Bhavan, 198, J Tata Road, Churchgate, Mumbai-20
    Tel: (91-22) 6631-4055 Fax: (91-22) 2202-8550 Turn Multibagger

    Report date: 30th December 2008

    Tata Motors Ltd.

    Market data Investment rationale


    Current price Rs 149 (BSE) ƒ Look at the structural, not cyclical: It is indeed not a good time to
    Market cap Rs 57,469 m be an auto manufacturer in the country. Everything that can go wrong
    Face value Re 10.0
    with the industry has gone wrong in the past one-year or so. Factors
    such as high interest rates, steep input costs, cash crunch arising out
    FY08 DPS (Rs) 15.0
    of huge capex plans and higher fuel prices have all combined to put
    BSE Code 500570 pressure on the volumes and profitability of auto companies and this
    NSE symbol TATAMOTORS has manifested itself in the hammering the sector stocks have
    No. of shares 386.0 m received on the bourses.
    Free float 66.7%
    52 week H/L Rs 783 / 122
    Will these factors leave a permanent imprint on the fortunes of the
    company? Quite unlikely. We believe the issues affecting the sector
    and the company’s growth are mostly cyclical in nature and hence,
    Rs 100 invested is now worth
    from a long-term perspective, the growth story remains intact. In other
    400 words, truck makers will continue to buy commercial vehicles (CVs) to
    Tata Motors: Rs 37 transport even more goods and people will continue to hop into cars
    300
    Sensex: Rs 164 to take themselves from point A to point B much faster and safer.
    200
    To cater to this growing demand, Tata Motors has lined up an
    100
    impressive array of products across segments and this will ensure
    - that a significant portion of the growth in the auto sector also accrues
    Dec-03 Jul-05 Feb-07 Sep-08 to it. We expect the company’s total volume sales to grow at a
    compounded annual growth rate (CAGR) of 8.5% between FY09 and
    Stock price Performance FY11 (excluding the Nano), driven by its new launches and a strong
    Tata Motors Index* distribution network.
    6-Mths -66.4% -35.3%
    ƒ ‘Nano’ could spring a surprise or two: Ever since this ‘people’s car’
    1-yr -77.7% -53.9% was displayed at the auto expo in January 2008, praises have not
    2-yr -56.6% -18.0% stopped flowing in. Expected to create an altogether new segment in
    2 yr returns on a CAGR basis the passenger car space, we expect the ‘Nano’ to contribute as much
    *BSE Sensex
    as 6% to Tata Motors’ total net sales by FY11. Contribution to
    operating margins though is expected to be on the lower side on
    Shareholding (Sept-2008) account of the low margin-high volume nature of the product.
    However, if volumes and margins turn out to be a lot better than our
    Category (%) projections, one could see a further improvement in the company’s
    Promoters 33.3% profitability.
    Banks, MFs, FIs 17.5%
    FIIs 14.9% ƒ JLR a good deal for the long haul: In 2008, Tata Motors acquired
    two iconic brands ‘Jaguar’ and ‘Land Rover’ from Ford for a total
    Indian public 10.9%
    consideration of US$ 2.3 bn (Rs 92 bn approx.). We believe while
    Others 23.3% the deal will not add much to shareholder value creation in the near
    Total 100.0% term, the technological expertise that rests with these brands will
    indeed benefit the company in the long-run. Furthermore, Tata
    Report prepared by Motors can also leverage JLR’s well spread distribution network to
    Equitymaster Agora Research launch its own products in the future. We expect JLR to contribute
    Private Limited. Rs 140 per share to Tata Motor’s intrinsic value by FY11, a 20%
    www.equitymaster.com discount to the purchase price of US$ 2.3 bn (Rs 92 bn approx.).
    [email protected]

    www.equitymaster.com Page 4
    Equitymaster Agora Research Private Limited
    One Stock That Will Repeat History And
    15, Khetan Bhavan, 198, J Tata Road, Churchgate, Mumbai-20
    Tel: (91-22) 6631-4055 Fax: (91-22) 2202-8550 Turn Multibagger

    Report date: 30th December 2008

    Investment concerns cheapest car till date, the first batch of which is likely
    to roll out towards the end of the current fiscal year.
    ƒ Competition intensifying: The global Tata Motors is also the first company in the Indian
    automotive industry is brutally competitive. India, engineering sector to be listed on the New York
    by virtue of being an important cog in the wheel Stock Exchange.
    of future growth, cannot remain immune to it for
    long. Over the past few years, almost all of the Valuations
    world’s leading automakers have either set up
    shop here or have made announcements to that We have used sum of the parts method to arrive at
    effect. Hence, in a few years India is likely to the intrinsic value of Tata Motors from an FY11
    witness a mad scramble for market shares and perspective. We have valued the company’s core
    reduced profitability. Although we expect Tata business using an EV/EBIT multiple of 7.5 times.
    Motors to grow at the same rate as market, an Using this multiple and after allowing for net debt,
    inability to do so might negatively impact our we arrive at an intrinsic value of Rs 250 per share
    estimates of the company’s intrinsic value. for the core business from an FY11 perspective.

    ƒ Delayed revival in the CV business: In view of Furthermore, we have valued the company’s
    steep financing costs as well as the current subsidiaries at Rs 250 per share, with a contribution
    macroeconomic environment, a lot of truck of Rs 140 from JLR and Rs 110 from its various
    operators have deferred their plans of CV other subsidiaries including a 20% holding company
    purchases. Although we have been conservative discount. Thus, adding this all together, we arrive
    in our estimates and have assumed the at a total value of Rs 500 per share on the basis
    domestic CV volumes to grow at a CAGR of 8% of FY11 estimates. Considering the current price
    between FY09 and FY11, the possibility of even of Rs 150 or thereabouts, we expect the stock to
    these projections not being met cannot be become more than a three bagger from a 2-3
    denied. year perspective.

    ƒ JLR woes could worsen: The unprecedented Key numbers


    and the systemic fall in global car markets in the Standalone (Rs m) FY08 FY09E FY10E FY11E
    past few months has left the company’s latest Revenue (Rs m) 287,308 265,360 303,415 334,339
    acquisition, Jaguar Land Rover, with working
    PAT (Rs m) 20,289 12,650 14,335 15,710
    capital problems. If the downturn persists for
    long, Tata Motors will have to continue injecting EPS (Rs) 52.6 24.7 27.1 29.4
    cash into the company, thus resulting into CEPS (Rs) 71.2 41.9 48.1 53.4
    deterioration of its financial health and
    ultimately, our assessment of the intrinsic value Price to earnings (x) 2.8 6.0 5.5 5.1
    of the company. Price to cash flow (x) 2.1 3.6 3.1 2.8

    Background
    Tata Motors is India's largest manufacturer of
    commercial vehicles (CV), with an overall domestic
    market share of 62% in FY08. The company is also
    the second largest producer of passenger vehicles
    (15% share in FY08). Its plants are located at Pune,
    Jamshedpur, Pantnagar and Lucknow. The
    company acquired the CV division of South Korean
    auto major Daewoo in 2004 and this is likely to help
    it augment growth in the higher tonnage CVs, an
    area that holds considerable promise in the future.
    More recently, the company recently acquired two
    iconic brands, ‘Jaguar’ and ‘Land Rover’ from Ford
    for a total consideration of US$ 2.3 bn and this is
    likely to transform it into a global player in the
    passenger vehicles space. It is also credited with
    announcing the launch of ‘Nano’, the world’s
    www.equitymaster.com Page 5
    Equitymaster Agora Research Private Limited
    One Stock That Will Repeat History And
    15, Khetan Bhavan, 198, J Tata Road, Churchgate, Mumbai-20
    Tel: (91-22) 6631-4055 Fax: (91-22) 2202-8550 Turn Multibagger

    Report date: 30th December 2008

    Disclosure: The author of this article does not hold shares in the recommended company. Equitymaster Agora
    Research Pvt. Ltd. www.equitymaster.com does not hold shares in the recommended companies.
    Please click here to read our Terms of Use.

    www.equitymaster.com Page 6

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