India’s Largest Automaker and the World’s Cheapest Car

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It is no secret that carmakers, despite some recent favorable news, continue to struggle with sales due to the economic crisis. The crisis has increasingly encroached upon consumer purchasing power, leaving them with less money to spend on fancy things such as cars. Unsurprisingly then, the budget car segment has been doing slightly better. One of the firms that produce these very cheap cars hails from India, traditionally regarded as one of the world’s poorest countries, and is called Tata Motors (NYSE: TTM).

India in Focus

After a string of bad news, things finally appear to be picking up for Asia’s third largest economy. Recently having opened up a number of sectors to foreign private investment, India has signaled its eagerness to recapture its previously strong economic growth of over 8%. Currently, GDP growth sits around 5.5%, but analysts reckon this should pick up to 6.5% by next year. Some commentators prefer India over China due its strong domestic consumption, favorable demographics, and low labor costs.

Company Profile

Tata Motors is one of India’s largest companies. Indeed, it sometimes seems in India as if the Tata family owns everything. The company has a market cap of $16.55 billion and almost 60,000 employees. It is one of the key players of India’s automobile market, and the number one producer of trucks and commercial vehicles in the region. Tata relies on India’s domestic market for most of its sales, but is starting to make inroads in other markets as well. One of the products that have been doing particularly well is the Tata Nano, the world’s cheapest car. The Nano has already gone on sale in Sri Lanka and Nepal, and will soon go on sale in the West Indies. Selling at around 10,000 dollars, the car is meant to compete at the lower range of the budget segment. While the car has seen limited interest so far, in part due to its somewhat cheap image, it should see further sales growth in developing markets.

Earnings

Tata’s consolidated net revenue was up an impressive 30% YoY in the Q1 2013 earnings release. Net revenue in the Jaguar Land Rover division was up an even bigger 35%. Tata Motor’s standalone performance was more subdued according to management, with a drop in revenue of about 9%. Management cited lower volumes and a tough macro-economic backdrop as drags on revenue. Toyota Motors (NYSE: TM), who competes with Tata in the consumer automobile as well as the commercial segment, has been delivering even better results. Net revenue was up around 36%. Net income increased from 81.5 billion yen to 548.2 billion yen. Still, Tata may be looking at bigger growth in emerging markets with their low-budget vehicles.

Valuations and Metrics

In terms of valuations and metrics, Tata looks like a bargain. However, automobile manufacturers tend to trade at lower P/E multiples than most other sectors. Tata trades at only 6.8x earnings and 2.65 to book. Toyota, on the other hand, trades at 14.19x earnings, which is pricey compared to the industry. Tata has a decent 9.83% operating margin, and a great return on equity of 43.8%. Debt is an issue though, with a total debt to equity ratio of 102.51.

Bottom Line

In short, Tata may be an interesting play for those looking to get their feet wet in the Indian market. India, despite some macro-economic headwinds, offers fantastic investment opportunities for those willing to take on some extra risk. Tata Motors is one of India’s most solid companies and continues to offer excellent growth in emerging markets, mainly due to its potential in the ultra-cheap car segment. Additionally, the company is priced quite attractively compared to the industry. 


DUJames has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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