Tata Motors and Its Bet on Air Powered Cars

by Ryan Fitzwater, Director of Research, The Oxford Club Market Trends Market Trends

Tata Motors and Its Bet on Air Powered Cars

If you aren’t familiar with Tata Motors (NYSE: TTM), allow me to introduce them to you.

Founded in 1945, today Tata Motors is India’s biggest automobile manufacturer.

The company was originally created to manufacture locomotives, but in 1954, working with Daimler-Benz AG (a relationship that ended in1969), it created its first commercial vehicle and has been doing so ever since.

Since the first car rolled off the line in 1954, Tata has produced and sold over 6.5 million vehicles in India.

Headquartered in Mumbai, India’s most populated city, the company is ranked as eighteenth-largest motor vehicle manufacturer in the world according to volume, producing trucks, passenger cars, coach buses and vans.

While they have five assembly and manufacturing plants in India, they also have plants in the United Kingdom, Argentina, Thailand and South Africa.

And Tata is in the process of expanding production into other areas of the world.

An Eye on China

In the last decade Tata pushed its acquisition peddle to the floor. The company took over Daewoo’s truck manufacturing unit in 2004 and gained controlling rights of bus and coach manufacturer Hispano Carrocera in 2005.

But its most renowned acquisition was of Jaguar Land Rover in 2008, purchased from Ford Motor Company (NYSE: F) for $2.3 billion during the heart of the financial crises.

This acquisition has been a homerun for the company as of late, as Jaguar Land Rover is seeing strong sales volume growth due to increasing acceptance of its vehicles in developing countries like Russia, Brazil, India and China.

At the end of February, India equity research group Avendus estimated that Jaguar Land Rover’s sales volume will grow at a compounded annual growth rate of 15% from 2012-2014.

Seeing the potential for strong sales growth in emerging markets, it’s no surprise that on February 21, 2011, Tata announced that its Jaguar Land Rover unit had chosen a partner to assemble cars in China, the world’s largest auto market.

China levies higher taxes on imported vehicles to support domestic production, pushing automakers like Tata to manufacture vehicles locally.

Creating a plant in China will likely enable Tata to sell Jaguar Land Rover vehicles at competitive prices in area that has become the company’s largest market outside of Europe.

Tata announced that it will double its investments in is Jaguar Land Rover division to $2.37 billion a year to develop new technologies and products, and plans to spend up to $158 million on the proposed facility in China.

The move makes sense as demand has started to falter in the long-established strongholds of Europe and the United States, where recent economic conditions have slowed consumer demand.

Jaguar Land Rover sales make up a whopping 57% of Tata’s revenue if you look at it 2011 numbers. And Jaguar Land Rover sales were $15.4 billion in 2011, a 48% increase compared to 2010.

It’s no surprise that the company is also considering building a plant in Brazil, another emerging market.

A Diverse Automobile Portfolio

What makes Tata a truly interesting story is its diverse range of vehicle products.

From top luxury brands like Jaguars and Land Rovers, you’ll also find that Tata is the producer of the world’s cheapest car, the Tata Nano.

In January 2008, Tata unveiled the “People’s Car,” and it hit the streets in India in March 2009, priced around $2,100.

The idea was to provide the world’s cheapest car to India’s growing urban consumers.

Tata Motors and many analysts had big expectations for the Nano, but it has yet to live up to its hype.

The idea was that emerging urban consumers breaking out of poverty would look to the Nano as their first car to prosperity. But as noted above, the taste for the cheapest car on the market isn’t what emerging consumers want; the trend has been to purchase second hand or more expensive cars.

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While Nano sales haven’t been stellar, I still applaud Tata’s visionary approach in trying to provide millions of families a car they can actually afford, which brings a great segue to Tata’s next potentially revolutionary product… air powered cars.

Is This a Bunch of Hot Air?

It might seem like something out of a sci-fi novel, but I kid you not. Tata is gearing up to introduce the MiniCat, a car that runs completely on compressed air.

Tata MiniCat Air Powered Car

The MiniCat is lightweight, fiberglass bodied, six-seat mini-van. The car uses compressed air stored in fibre tanks to push the engine’s pistons and create movement.

And its designers state that it costs less than a tenth to operate the vehicle compared to cars that run on gasoline.

Guy Negre is an ex-Formula One engineer who is the brains behind the air car. Using a development by Luxembourg-based MDI, once Tata takes the MiniCat commercial, it will be the world’s cleanest car, with zero emissions.

It’s quite compelling, considering it will have a 125-mile range (almost double of the most advanced electric cars), and a top speed of 68 mph. The cost to refill the onboard air tanks would only be around $2.

And the vehicle will have to ability to recover up to 13% of the power it uses through a pneumatic brake power recovery system.

The recharging of the MiniCat air tank requires a connection to a 220-volt power source for about four hours. But if the market picks up momentum, a recharge could take place at new or modified petrol stations. With a compressed air pump it would take about two to three minutes to fill the cars tank.

And here’s my favorite detail about the MiniCat: Since the engine doesn’t use combustion to power the motor there is less residue, which means you only have to change the oil every 30,000 miles, and it only requires one quart of vegetable oil.

Sounds Good, But What About Infrastructure?

Of course, you have to be skeptical of a market for cars that don’t operate on gasoline.

Electric, hydrogen and natural gas powered cars aren’t exactly driving all over U.S. roads right now. So why would the air powered MiniCat be any different?

For that answer you have to look at the difference between developed and developing countries, and their infrastructures.

Let’s just look at compressed natural gas (CNG). Currently the countries with the highest number of CNG vehicles are:

  • Pakistan: 2.74 million CNG vehicles
  • Iran: 1.95 million CNG vehicles
  • Argentina: 1.90 million CNG vehicles
  • Brazil: 1.66 million CNG vehicles
  • India: 1.08 million CNG vehicles

If you look at the list above, you can see that all of these are developing countries and have over a million natural gas vehicles on their roads. While in a developed country like the United States, there are only about 112,000 natural gas vehicles.

It’s simple… build as you grow. And the emerging markets have the advantage.

Developing countries that are just starting to build up their infrastructures don’t have to worry about the costly transition of a complete overhaul of their automobile refueling stations.

Countries like India could build air compressed fueling stations as they create their transportation infrastructure, making the development of a strong air compressed vehicle system possible.

In the next decade, you might see air powered cars out-number gasoline powered cars in developing urban areas all over the world.

Toyota (NYSE: TM) is already on board with the idea. The world’s largest auto manufacturer recently broke the compressed air-powered vehicle speed record, getting its Ku Rin all the way up to 80.3 mph.

With prices starting around $12,700, Tata hopes to launch the MiniCat near the end of 2012. From that point forward, we’ll see if Tata Motors can make history and change the face of automobile market in India and the rest of the world.

But lets put MiniCat story aside and take a look at some of Tata’s key metrics.

Always Looking for a Deal

When you look at Tata’s financials, you see a lot of indicators that it’s currently a good “Buy.”

First its price-to-earnings is a low 8.72 compared to the industry average of 14.41.

The company’s return-on-equity is over 67%, destroying the industry average of 21%. And it sports strong operating margins of 9.89%; the industry’s is only 6.92%.

Recent quarterly revenue growth was 43.5% compared to the same quarter last year, and quarterly earnings were up 40.5% over that same period of time.

Tata Motors Annual Revenue

Tata’s annual revenue has grown at a vigorous pace, from $1.9 billion in 2002 to over $27 billion in 2011.

If you’re looking for a big dividend payer, Tata’s 1.58% dividend yield (slightly below the industry average) is nothing to get excited about. But we aren’t looking at Tata to collect income; we’re looking for strong earnings growth.

Forbes magazine is on the same page here. The magazine listed Tata in their “Top Value Picks in The BRICs” (Brazil, Russia, India and China), giving the company their strongest buy rating of five.

And if you want another sign to tell you Tata is something worth looking at, you’ll be glad to find names like Morgan Stanley, Blackrock Group, Citibank and Credit Suisse on the list of its top 10 holders.

Good investing,

Ryan Fitzwater

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