Big Upside Potential For This Automaker
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Tata Motors (NYSE: TTM) is the biggest auto manufacturer in India, one of the most exciting markets in the world when it comes to long term growth opportunities. The business is cyclical and competition is tough, so investors will probably be exposed to a wild ride in shares of Tata Motors over the following years. But this is a company with extraordinary long term possibilities, and the stock is trading at attractive valuation levels, it’s certainly worth some consideration from investors with a high tolerance for risk and looking to capitalize growth opportunities in emerging markets.
The Indian passenger vehicle market has grown at a 17% annual compounded rate over the last five years, and India overtook Brazil as the sixth biggest producer in the world with more than 3 million cars produced in 2011, however car density in India is one of the lowest in the world with around 8 cars per 1000 habitants. There is still a lot of room for growth in the following years, as the industrialization process in India provides the fuel for population income growth and increasing vehicles demand.
Tata has exposure to both the low end and high end vehicle markets; the Tata Nano is sold for an introductory price of $2900, which gives it big potential considering the demand for low priced vehicles in India and other emerging countries. Unfortunately, the Nano has had some much publicized safety issues which have materially affected the company´s reputation and sales levels in that product.
There is a huge opportunity in the business of ultra low priced vehicles, but Tata definitely needs to find a solution to its problems before competition gets more intense in that segment. Renault, in collaboration with Bajaj Auto, has announced a new ultra low cost car to be launched this year, and more competition is expected to come in the middle term.
Tata also acquired the Jaguar Land Rover business for $2.3 billion during the recession following the 2008 financial crisis. This deal gave Tata Motors access to two widely recognized brands, an exclusive global distribution network and strong research and development capabilities. This premium vehicle segment now accounts for 57% of revenues and 65% of operating profits at Tata. Jaguar Land Rover has been particularly strong in markets like China and Rusia, which have performed strongly in the last years and have attractive middle term prospects.
There are some considerable risks in shares of Tata Motors, competitive pressure is expected to increase over the following years, and the Indian economy is hard to predict. Exchange rate volatility is another source of uncertainty since Rupiah devaluation would mean lower profits when translated to US Dollar terms.
When compared to other automakers like Ford (NYSE: F), Honda (NYSE: HMC) and Toyota (NYSE: TM), Tata comes out as the cheapest alternative trading at a forward P/E of 5.3. The company is probably riskier than its peers, but it also has some very exciting long term growth potential.
Those who are not afraid of volatility and are looking for a bet on the exciting prospects of the Indian automobile market could consider adding some shares of Tata Motors to their portfolio. The company will probably generate a wild ride, but the potential for profits looks really outstanding over the long term.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.