Tata Motors --Turbulent weather ahead

Tata Motors Ltd’s September quarter performance was a huge disappointment even with the low expectation from the market.  After the results were announced, leading brokerage firms have cut price targets for Tata Motors.

On the domestic front, commercial vehicle market (medium and heavy) is still subdued.  A year or so back Tata Motors had poached Mayank Pareek from Maruti in the hopes of reviving the passenger vehicle business and regain market share, this too has not gone as anticipated.

While passenger vehicle sales rose 8.5% year-over-year in the April-October period in India, commercial vehicle sales increased 8%.  Although Tata registered an impressive 14% sales growth for its passenger vehicle portfolio in the seven month period, this growth is still less than anticipated.

Much was expected from the launch of the Genx Nano, Zest, and Bolt models.  Following the launch of the sub 4-meter compact sedan, Zest in August of last year, the automaker’s monthly car sales in the country rose (year on year) after many consecutive months of decline.

After more than a year after launch, Zest is selling one-tenth the volume of its chief competitor, Swift Dzire.

Tata Zica, which is scheduled a January 2016 launch, will come with two engine options – a 1.05-litre 3-cylinder diesel and a 1.2-litre petrol engine. While the former is an all-new unit, the latter is the same that powers the petrol versions of the Bolt and Zest.  The pricing is expected to be Rs 3 lakh – Rs 4 lakh (the buzz being 3.6 lakh).

Rising disposable incomes and low fuel cost and the upcoming 7th pay commission bonanza are supporting growth in the passenger vehicle segment in the country, Tata Motor with its poor quality products (passenger car segment) is not expected to catch much of the action even with its HorizonNext products.

Tata Motor’s passenger car sales are still far behind the market leader Maruti and even with the new launches (Tata Motors plan to launch 3-4 new car every year), new marketing campaign, new brand ambassador (only time will tell if a football superstar can pull customers in non-football countries like China and India) Tata Motors still has poor perception in the customer’s mind (truck like comfort in cars!!).

In fact Goldman Sachs has downgraded Tata Motors to sell from neutral as it believes the stock has priced in better H2FY16 volume growth and margin after H1FY16 slump.

Tata Motors has rallied 16 percent in past three months against a 10 percent fall in the BSE Sensex.  Goldman Sachs believes the stock is going to face headwinds of China’s moderation of growth and volume shift to lower-margin Jaguar brand.  The brokerage has slashed 12-month target price to Rs 363 from 369 and cut FY16-18 earnings per share estimate further by 21-26 percent driven by JLR  margin weakness and elevated depreciation & amortisation charges.

Tata Motors posted a loss of Rs 430 crore in Q2FY16 against profit of Rs 3,290.8 crore in year-ago period (impacted by Tianjin Port explosion).

JLR's operating profit dropped 36.9 percent to 589 million pound in September quarter compared to 933 million pound in same quarter previous year.

"Further, cyclical upturn in the India business remains sub-optimal with upcycle FY18 RoE (return on equity) of 11 percent even as we build-in in revival in the commercial vehicle (CV) market share," it says.

Moreover, the recent Volkswagen ‘Dieselgate’ may also weigh on JLR’s regulatory capex, Goldman feels.

The management in the conference call said that margin erosion was due to temporary challenges—adverse regional mix and product mix, along with high product launch costs, marketing spending and unfavorable forex revaluations.

Although developed countries like the UK and the US are showing higher sales growth, these are not sufficient to offset the fall in China’s sales.  While production in China through JLR’s local joint venture to cater to its domestic market is a positive as it will bring down the prices and help compete against other luxury brands.  This coupled with lower commodity prices might offset the lower sales in China if the company can achieve higher volume sales.

I expect little or no upside from this level (short term) and see the stock hovering around Rs 345-360 in the near term.  My view on Tata Motors remains reduce.  As for long term investing, I see better rates to start taking an investment call as there is a strong possibility of falling in a value trap at the current price level.

DISCLAIMER:  These are my views and I can change them at any time.  I plan to go short on Tata Motors at around Rs 428/- 432/- range but can change my view and even go long at any point of time.  Consult your advisor before going short on Tata Motors.