As promised I am writing to give an overview of why TATA Motors looks a compelling investment.
As of a week ago it traded at €16.50, now it trades at just over €20.
The auto industry worldwide is riding a wave of increased sales. The main Western markets are buoyant, particularly the US where Ford and GM are creaming it but also in emerging markets where sales of premium brands such as BMW, Jaguar and Land Rover are booming.
The last two names, Jaguar and Land Rover are in fact owned by TATA who bought them from Ford in 2008 for not a lot.
They both have a number of wonderful new models garnering much critical acclaim and they are valuable premium brands.
To understand why TATA is attractive is simply to know that it is valued at about half of BMW or Mercedes multiples and has future growth projections twice that of Ford for a comparable current price.
So sounds like a no brainer (definitely was at 16.50, dumb ass here was waiting for 16, doh!)
So why the low price?
TATA is Indian and India is not well regarded currently, the go-go-growth of emerging markets has been questioned recently with distinctions being drawn between healthy, self-funding, export strong, low debt, business friendly countries and those with structural, economic and political issues; India is a member of the second type.
It is bureaucratic, politically unwieldy, runs big deficits and has slowing growth.
TATA manufactures affordable city (tiny) cars for the emerging markets plus it has a truck division again selling into EM, so the negatives trumped the positives in the mind of the market, hence a beaten up share price.
Only about 30% of TATA’s turn over comes from India
The Jaguar and Land Rover brands come with the stock almost for free and they are of the highest quality.
The future growth of TATA is projected to be much higher than other big premium brands; they have much greater room for expansion.
They have demonstrated with the new Jaguar and Land Rover models that they design and build brilliantly.
India will sort itself out, the pressure exerted recently on the Rupee forced considerable liberalisations from the Indian Central bank, with the weight of market money and power acts as a sort of good practice police force now. If something needs changing markets will hammer it until the changes are made so what is perceived as crisis is actually in many cases positive events forcing necessary and beneficial actions.
Items such as cars are consumer staples and consumer discretionary items.
There is an inbuilt replacement cycle for cars generally; over the last five years (excluding the cash for clunkers manipulation) of the replacement of vehicles is held back because of an unwillingness to buy big ticket items then once confidence returns the shortfalls of previous years are condensed into a catch up buying frenzy (cheap auto loans currently available are helping as is the perception that cheap money will go at some point).
This is in fact exactly the same phenomenon that the housing market experiences, over a cycle house prices rise by inflation plus 2-3 %, it’s impossible for them to rise much faster all other things being equal because they will simply become unaffordable. (This logic does not apply to markets such as London and Manhattan which are world cities and therefore have completely different buying metrics).
However within a cycle there will be a period when they rise well above this normalised growth and then a period when they rise less. It will even out at the above average (as will annualised car sales numbers) over the cycle but the increase won’t be linear.
The point of the excitement with emerging market consumption though is that this is genuinely new, this is a bigger cake not brands vying for a larger slice of an existing and static one.
We missed the TATA share sale event this time, everything that looked bad (and potentially could have got worse such as Syria, decline of the Rupee etc) didn’t happen and both Ford and GM came out with stellar numbers last week which buoyed the Tata stock price as a look through investment.
It’s a quality Company and it’s still cheap, just not as cheap.
NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.