Top picks 2012: Tata Motors

Indian automaker sees strong growth at home and in China, though low-end Nano disappoints.

By TheStockAdvisors Jan 2, 2012 10:19AM
Image: Los Angeles, Calif., traffic on Interstate 405 © VisionsofAmerica/Joe Sohm/Digital Vision/Getty ImagesThis post is one in a series in which over 50 newsletter advisors share their Top Picks for 2012.  

By Yiannis Mostrous, Global Investment Strategist

Tata Motors (TTM) is India's dominant producer of commercial vehicles and controls 60% of the market. It is also a leading manufacturer of passenger cars, and owns the Jaguar Land Rover brand of luxury cars and sport utility vehicles.

After declining for months, Indian car sales increased by 8% year-over-year in November. For the same month Tata Motors achieved sales growth of 41%. The company sold 76,823 units, with the low-cost Nano passenger car accounting for 6,400 units. 

The Nano, which was marketed as the world's smallest and most affordable car, was greeted with great fanfare during its launch. Tata spent about $600 million to develop and manufacture the Nano, but the returns on this investment have disappointed. 

Tata's Jaguar Land Rover division, which was acquired from Ford (F) in 2008 for about $2.3 billion, has meanwhile posted strong growth. Although Tata was criticized at the time for overpaying, JLR has proved to be a good acquisition, as the company was coming out with new models that have been well received by consumers. 

Tata Motors also benefited from a recovery in emerging markets that began in 2008, and a strong 2009-10. As a result, JLR now accounts for about 55% of its revenues and more than 60% of earnings before interest, tax, depreciation and amortization (EBITDA). 

Europe currently accounts for 42% of JLR’s sales volume, the U.S. for 22% and China about 11%. China’s contribution to sales should increase to about 15% in a few years, offsetting expected declines in Europe and the U.S.  

China currently contributes about 17% to JLR's revenues, up from just 5% in 2009. Profit margins are higher in China than they are in Europe and the U.S. because there are fewer buyer incentives for consumers.

Tata Motors' Indian business currently contributes about 40% to revenues and 28% to the company's EBITDA. 

Light commercial vehicles are Tata Motors' most profitable business line, and until recently the company had a near monopoly in this segment. The passenger cars division (21% of revenues) has traditionally been a drag on profits. Although Tata is the third-largest passenger vehicle manufacturer in India, the division only contributes 5% to 6% to the bottom line.  

Tata Motors' stock currently trades more than 50% below its high at the end of 2010. Although valuations are supportive, they may not yet be at rock bottom. Investors should buy at current levels, while recognizing that this is a high-growth, high-beta stock. 

Steven Halpern's offers a free daily review of the favorite stock ideas of the nation's top financial newsletter advisors.

Tags: FTTM


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