Tata Motors Puts the Pedal to the Metal in India's Car Market

by Tony D'Altorio

Tata Motors Puts the Pedal to the Metal in India's Car Market

by Tony D'Altorio, Investment U Research

Friday, August 20, 2010

Many investors know that as of this year, China has the world's largest car market. But too many have no clue about India's fast-paced automotive sales.

Sales there have been driven sharply higher by several factors, all leading to one impressive final result.

The Society of Indian Automobile Manufacturers (SIAM) reported that passenger car sales hit a record high last month at 158,764, rising by 38% year-on-year.

That growing demand actually contrasts with China, where July sales rose at their slowest pace in 15 months.

Of course though, India didn't put the brakes on its economy in the same way... far from it.

India's Car Market - A Car-Manufacturing Hub

Global carmakers are increasingly viewing India as a small car-manufacturing hub.

Toyota ADR (NYSE: TM), Nissan ADR (OTC: NSANY), Ford (NYSE: F) and Volkswagen ADR (OTC: VLKAY) are all releasing new models there these days.

That ramp-up has corresponded with India's recovering economy and revival of credit.

Just 18 months ago, many private sector financials had withdrawn from the car market altogether. But now, they're opening their doors to auto loans again.

That has led to growing competition for customers with state-owned banks. And that, in turn, had improved the pricing and availability of auto loans.

Most cars sold in India are small cars or the so-called B segment. Darius Lam, an auto analyst at JD Power, comments, "There are a lot of new models in the B segment, like Volkswagen's Polo, Nissan's new Micra, and Ford's Figo and it has really given a big boost to the [sales] numbers in the first six months of this year."

India's car market is also braced for another change, with Tata Motors ADR (NYSE: TTM) stepping into high gear...

India's Very Own Tata Motors

Tata Motors holds 61% of the country's truck market and produces the third most passenger vehicles.

Over the last five years, it has also grown annual revenue by an average 25%. This year's second quarter came in particularly strong though with a 64% increase.

During the quarter, Tata sold 181,708 vehicles, up 48% from the year before. Its biggest business, medium and heavy-duty trucks, saw a 62.4% increase in sales year-on-year.

Those better-than-forecast figures came partially from strong domestic sales. But surprisingly, its luxury Jaguar and Land Rover brands also took off in emerging markets such as China, where they grew by 104%.

Tata has really turned both brands around since buying them in June '08. While Ford never could turn a dime on either in the fifteen years it held them, they have now produced three straight profitable quarters for Tata.

Tata's Nano Paves A Clear Road Ahead

Also to its credit is the world's lowest-priced car, the Nano. Tata started producing it in July 2009 after receiving orders for over 200,000 of the vehicles in just three months.

Demand from earlier this year came in so strong that it opened its Gujarat plant specifically to produce the tiny car. The plant will have an annual capacity of 250,000 cars a year to start and 350,000 if necessary.

Better yet, Sugato Sen, senior director at SIAM, sees a clear road ahead for Tata. Partially, he bases that on India's ambitious highway infrastructure plan, set to finish by 2015.

"30% growth might not always be possible," he clarifies on the larger industry, "but the environment is positive and demand is high."

Tata Motors can attest to that environment, already poised for further gains. And its stock reflects all of that, hitting its highest level in over 20 years on its Indian index.

In fact, since hitting a low of 126 rupees in February 2009, it has risen seven fold. Yet here in the U.S., its ADR - while performing similarly - is still dirt-cheap with a forward PE ration of 8!

And unlike American car companies, Tata pays a dividend. In fact, during its 54 years as a publicly traded company, it has paid out in all but two. Currently, its ADR yields about 2.3%.

Tata's latest results have cemented its recovery from the depths of the economic crisis last year, much less its debt worries from purchasing Jaguar and Land Rover.

All in all, it looks like Tata Motors has turned a corner onto a new, very profitable road.

Good investing,

Tony Daltorio

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