The Indian multinational automotive manufacturing company, TATA MOTORS LTD has, since inception, enjoyed credibility by one and all, under its parent, the TATA group. With the company ranging back to mid 1940s, Tata Motors Ltd has seen several historical moments, beginning with it being a manufacturer of locomotives, to producing its first commercial vehicle in 1954, to entering the passenger vehicle market in 1988, to becoming the first Indian manufacturer to achieve the ability of developing a competitive indigenous automobile, to launching the first fully indigenous Indian passenger car, Indica, in 1998, to acquiring the South Korean truck manufacturer Daewoo Commercial Vehicles Company in 2004, to purchasing Jaguar Land Rover(JLR) from Ford in 2008, and to launching the world’s cheapest car, Tata Nano, in the same year. The phase was not always immaculate and smooth, but the company and the experience that backed it, managed its way forward at all points.
This is the exact statement that investors of the company are eagerly waiting to hear sometime soon in the future, after the recent headwinds that TML has been facing. It has made them wary following certain happenings in the current financial year.
WHAT ARE THE CHALLENGES?
- Rating agency Moody’s downgraded the corporate family rating of Tata Motors by a notch from Ba1 to Ba2 based on its expectation of continued weakness in the company’s consolidated credit metrics over the next two years, led by the wholly owned subsidiary, Jaguar Land Rover (JLR).
- On 5 July’18, JLR made a statement saying that a “hard Brexit” would cost it 1.2 billion pounds (Rs.11500 crore) annually and curtail its future operations in UK. Britain’s biggest car maker also said that the UK plants and at least 40,000 jobs would be at risk if the country left the European Union without a free trade de
- In mid-June, Tata Motors revealed plans of investment worth 13.5 billion pounds (around 1.2 lakh crore) in the next three years in its subsidiary JLR. Investment will be 4.5 billion pounds per annum from FY19 to FY21 and subsequently targeted at 12-13 per cent of turnover. There were concerns regarding company’s cash flow and top line due to higher than expected capital expenditure that hurt the investor sentiments.
- To top it all off, TML’s Q1 results for FY 18-19 came as a huge setback for the shareholders that left them traumatized. This validated that the headwinds were not just minor adversities that the company could easily find their way out of. It reported a consolidated loss of Rs.1863 crore against the analysts’ ETNow poll estimate of a profit of 1500 crore, the worst since 2009’s December quarter. The standalone results improved but the subdued performance of JLR remained a big concern and it continues to remain so, even today.
“With regards to JLR, we faced multiple challenges including issues like channel de-stocking, China duty impact, the market issues like diesel concerns in UK and Europe, and other factors,” said TML Chairman Natarajan Chandrasekaran. While many seem one-offs, such disappointments have been a recurring issue for JLR in a weak environment.
While all of these facts were being digested, the share price of Tata Motors, that has seen a downtrend since the beginning of 2017, saw a plunge of 59% from those levels, that includes a fall of 33% in the current FY itself.
Guenter Butschek, CEO & MD of Tata Motors Ltd, with the experience of being a COO at Airbus for 4 years, and working for German automotive corporation, Daimler AG for 25 years, came up with a transformation plan 3 months after taking up office for TML in February 2016. However, events such as ousting of Cyrus Mistry as Tata Sons Chairman and then demonetization, hit liquidity and sales. So along with the newly appointed Chairman Natarajan Chandrasekaran, Butschek came up with a new Turnaround plan in 2017, the execution of which was approved by the Board.
WHAT IS TURNAROUND 2.0?
The turnaround strategy refers to Butschek’s plan that was given shape in 2017 to enhance the company’s top and bottom line performance by overhauling the domestic supply chain, product portfolio and organizational structure. This was known as Turnaround 1.0 that majorly focused on its commercial vehicle business along with other businesses.
The initiative showed results when Tata Motors’ Indian unit reported a net profit of 184 crore in the three months ended 31 December’17. That helped the owner of British luxury car firm JLR post an 11-fold jump in its consolidated profit for the quarter.India’s largest automaker by revenue has continued the programme into the next financial year, i.e. 18-19, terming it Turnaround 2.0, with a special focus on its passenger vehicles division, which has languished over the past few years.
“Last year Turnaround 1.0 focused on domestic CV segment, and now we decided to continue the CV journey against even more aspirational targets with Turnaround 2.0 this year and also enter the passenger vehicles in this Turnaround plan.
A very simple formula of Turnaround 2.0 is – Win decisively in CV, Win sustainably in PV, and embed a culture of ‘Turnaround’ deep into the organization.”, said MD & CEO, Guenter Butschek.
“For us as an organization, it was critical to get the revenue and profitability right, which was in terms of CVs. The logical consequence was that because it worked for CVs, it should work for PVs as well”, he said.
Last August, while addressing shareholders, Tata Sons Chairman, Natarajan Chandrasekaran expressed concern over the company’s falling CV market share from a high of nearly 60 per cent five years back and emphasized on the turnaround plan for its domestic business with a special focus on the ailing commercial vehicles business.
“FY18 has been landmark year for the CV business of Tata Motors. Reviving the domestic CV business was one of the key focus areas in the company’s turnaround strategy. We are delighted that we have gained good momentum and shown growth on the back of strong product portfolio across segments and intense customer engagement,” Tata Motors President (Commercial Vehicles Business) Girish Wagh told. “The execution of sales enhancement, rigorous cost reduction and timely product launches, delivered quick results on CV volumes, market share grew and bottom-line improved during the year,” he added. With the successful last year, the company is now changing gears to move one level higher with Turnaround 2.0 in FY19. Guenter wants PV to be self-funding and profitable under Turnaround 2.0. Tata Motors is currently the number four passenger vehicle maker in the country with Maruti, Hyundai and Mahindra being the top three.
Its cumulative domestic sales of commercial and passenger vehicles segments for FY18 were 5,84,564 units compared to 4,79,435 units in FY17, a growth of 23 per cent. The overall industry CV sales in 2017-18 were at 8,87,316 units as against 7,29,360 units in 2016-17. In terms of market share, Tata Motors increased its CV share to 45.1 per cent in FY18 from 44.4 per cent in FY17, and its PV share to 5.7 per cent in FY18 from 5.1 per cent in FY17.
Now when the standalone results have shown improvement, subsidiary Jaguar Land Rover, considered as the crown jewel of TML, is posing as the weakest link for the company and is proving to be a bit of a drag for the automaker. Some countries in which the British automaker operates has it’s fate written as follows:
- North America – Possible trade wars may impact JLR exports.
- China – Slowing economy may hamper growth, and JLR being a luxury carmaker, a slightly sluggish economy may impact sales considerably. Bulk of their margins from the Chinese markets.
- UK – To be hit by Brexit and may need to face harsh facts. UK Prime Minister, Theresa May, said on Brexit, “In certain ways, our access to each other’s markets will be less than it is now”.
THE DIVERSIFIED PRODUCT MIX
Tata Motors is involved in manufacturing of vehicles in categories that include passenger cars – Hatchback, Sedan and Sports Utility Vehicles (SUVs), commercial cars, trucks, vans, coaches, buses, sports cars, construction equipment and military vehicles.
The product portfolio in the marketing mix of Tata Motors also covers brands like Jaguar and Land Rover. The consumers perceive the Tata Motors brand as one which produces vehicles that provides reliability, high quality, and efficiency. Tata Motors ranks in top four passenger vehicle brands in India and the leader in commercial vehicles. It focuses on innovation, and continuously works on developing new vehicles with robust technical specifications. In addition, Tata Motors follow stringent quality norms and abide by the rules laid down by the regulatory agencies.
In its focused development towards innovation, Tata Motors had unveiled electric versions of Tata Indica car and Tata Ace commercial vehicle that runs on lithium batteries. During Commonwealth games, Tata Motors presented CNG – electric hybrid buses to Delhi Transport Corporation that were part of environment friendly buses. The Tata 407, from the Light Commercial Vehicle (LCV) category has sold over 5,00,000 units since its initial launch. The Passenger Vehicle (PV) segment has seen launch of various hatchbacks including Nano, Bolt and Tiago; Sedans including the successful Tigor and Zest; and SUVs including Nexon, Sumo Gold, Hexa and Safari Storme.
The Commercial Vehicle (CV) segment has seen Pick-Ups and Small Commercial Vehicles (SCV) like Ace Range and XL Range; Passenger transportation vehicles including coaches, buses and vans; Intermediate and Light Commercial Vehicles (ILCVs) like Ultra Range and LP Range; and Medium and Heavy Commercial Vehicles (MHCV) like the Cargo Range and the Construck Range. Coming to the subsidiary’s mix, Jaguar models like XE, XF, XJ, F-Type, E-Pace; and Land Rover models like Range Rover Sport, Discovery, Evoque and the much in demand Velar (World Design of the year) are some products that sell globally and comprise a major portion of TML’s revenue.
Recent launches include the Tigor AMT, Tiago Wizz, Ace Mega XL, Ultra AMT Bus, Jaguar XEL (exclusively produced in China), the iconic Jaguar E-Type, limited edition Range Rover SP Coup, etc. Supportive of the government initiative, Butschek also did not rule out the company’s focus on electric vehicles (EVs). Tata Motors has so far delivered some 200-odd fully electric Tata Tigor(s), its compact sedan, and recently launched Jaguar I-Pace, world’s first fully electric premium SUV. First-time buyers continue to be a huge opportunity that can be tapped in the EV segment. Pointing out that EVs were the need of the hour, the MD and CEO said Tata Motors was open to experimenting with electrification of fleet of different commercial operators. Commercial fleet sales, at present, account for 10-12 per cent of the total vehicle sales of the company. “We have a plan and are in active discussion with such fleet operators,” he said.
WHAT DO THE RATIOS INDICATE?
- Current Ratio (Current Assets/Current Liabilities) fell below 1 (currently 0.95) in the FY ended 2018 from over 1 in the previous years indicating that the company might be on the verge of facing a liquidity crunch. Somewhat similar is the signal given by the Quick Ratio, which has decreased from 0.70 to 0.66 over the same period.
- P/E Ratio (Current Market Price/Earnings Per Share) of the company stands at a healthy 3.85 compared to an industry P/E of 31 signaling that the books are not overvalued.
- P/B Ratio (Current Market Price/Book Value) is at 0.67 which shows that currently, the share price is undervalued as it is trading at less than its book value. This is a good sign given that the company performs well in the future. (CMP ~223.7, BV ~332).
- Net Profit Margin (Net Income/Net Sales) stands at 2.3% for the last FY which is a drastic reduction of 72% from FY 2012. Moreover, it is the lowest amongst its peers with Eicher Motors at 19%, Ashok Leyland at 6.1% and Force Motors at 4.3%.
- Return on Assets (Net Income/Total Assets) was at 2.71% for FY 17-18 at par with FY 16-17 indicating stable asset quality that helps in increasing profitability. However, it is at a lower level from previous years and much less compared to its peers.
- Return on Equity (Net Income/Shareholder’s Equity) is at a satisfactory 9.4% but has reduced over the previous years. The company is well placed amongst its peers at this front.
- Debt/Equity Ratio (Total Liabilities/Shareholder’s Equity) is quite modest at 0.82 down from 1.82 last year. This is a healthy sign showing the efforts of the company to draw down debt to reduce interest payments, thereby aspiring to achieve its goal of becoming ‘self-funding’ and ‘profitable’.
- EV/EBITDA Ratio stands at 4.38. It is a valuation metric used to identify whether the company is overvalued or undervalued. A low ratio is generally considered healthy and TML is one company that is currently less aggressively valued than its peers.
- No dividend has been paid by the company for the FY ended 2018. In fact, TaMo has paid dividends to its equity shareholders in only 1 out of the past 4 years. Thus, the Dividend Payout Ratio here is NIL.
All the above ratios are reported on a consolidated basis. It may be concluded from the above data that though the company is presently undervalued, this will reap benefits to the investors in the years to come only if their growth story continues. TML needs to witness higher earnings from its operations on a consistent basis to start paying generous dividends to its shareholders thereby improving its ordinary return ratios.
VALUATION OF THE COMPANY
Enterprise Value, that takes into consideration the market value of equity and debt minus cash and short-term investments, is more reliable than the market capitalization for estimating the value of a company because this takes the borrowings (debt) of the company into account as well. Based on this, TML was rightly worth Rs.1,55,111 crores as on 31.3.2018 compared to a market cap of around Rs.95000 crores. This hints on overvaluation and greater risk, majorly because of high debt on the company. The value has seen a reduction from its EV of Rs.2,15,000 crores in FY 2014.
Eicher Motors with almost the same market capitalization, has an EV of about Rs.76000 crores, which is mostly because of its lower debts and higher cash and cash equivalents than Tata Motors. Ashok Leyland, another competitor, smaller in size, has an EV of around Rs.54000 crores, which would’ve been higher had it not been for its staggering cash reserves and short-term investments. Maruti Suzuki, amongst all these companies has the highest EV standing at around Rs.2,67,000 crores, it being the largest in size too.
The intrinsic value calculated by the Discounted Cash Flow Model (based on various assumptions) gives the share price of TaMo a value of Rs.322 against the current market price of Rs. 223 and Book Value of Rs.332, which is a clear signal of undervaluation of the stock, especially given the fact that analysts estimate the revenue earnings of the company to rise significantly in the future years. A resilient performance from the automaker is required to live up to such expectations. The same model, when applied for competitors, gave dazzling results. Eicher Motors led analysts to arrive at an intrinsic value of Rs.16700 compared to CMP of Rs.24165, showing that the stock is overvalued. Also, Ashok Leyland, with a CMP of Rs.119, saw its intrinsic value stand at a whopping Rs.320, almost 2.7 times the current price.
The company has shown no positive movement in its share price in the past 1.5 years. It has been forming lower highs and lower lows. The stock has broken important support levels in recent weeks, initially the 300 levels with huge volumes, and the latest being the crucial level of 250, below which it saw a breakdown and is now hovering around 225 levels. Analyst believe that the only silver lining here for the company could be excellent monthly sales numbers and thereafter, higher than estimated Q2 results. However, from the long-term perspective, Tata Motors’ JLR needs to overcome the headwinds it is facing and flourish with some amazing numbers in the next few quarters to follow.
Natarajan Chandrasekaran, Chairman, Tata Sons said, “I am delighted looking at the progress made by the domestic business with the ‘Turnaround 2.0’ strategy. We continue to gain market share while strongly improving profitability in both commercial vehicles and passenger vehicles. Our drive for increased transparency continues with separate segmental results for CV and PV businesses from this quarter. I believe that with our focused efforts we are well positioned to ‘Win Decisively’ in CV and ‘Win Sustainably in PV.”
Demand for the Company’s vehicles in the Indian market is subject to seasonal variations, generally peaking in between January and March, and in the festive season starting from September onwards, although there is decline in demand just before the budget in February and in December due to year-end. Lean periods are seen from April to July.
“For Jaguar, we are expecting a strong second half of the year. Sales of the Jaguar I – PACE, supported by a wave of critical acclaim by the international media, have only just begun and the new E-PACE will join our product line-up in China. Refreshed Land Rover models, in particular the new Range Rover and Range Rover Sport plug-in variants, have a growing customer base. Strong demand for the Range Rover Velar, 2018 World Car Design of the Year, continues to drive sales,” said MD & CEO Guenter Butschek.
“We want to focus on top line growth, cost reduction, structural improvement of our processes, and customer centricity. Today, the Turnaround plan is focused on commercial vehicles for the very simple reason that commercial vehicle is the backbone of Tata Motors in terms of revenue and profitability and we need to get it right in order to protect and build the future of Tata Motors. The market share enjoyed by the company was 61% which has dropped down to around 44% and also there is a concern of heavy discounting that is eroding the margins. So, to address that, steps will be taken for a cost reduction in the entire organization, not only focusing on the commercial vehicle segment but also the passenger vehicle. We had a tough start transitioning from BS III to BS IV norms, to introduce new products, and ramp up the capacity to meet the market demand. The concern that heavy discounting helped us gain market share is actually not true because the last few months’ statistics show that it is the launch of new products at the right time that led us to increase our market share. We plan to regain our share through volume to boost topline. The company sees a 1500 crore bottom line improvement coming form an augment of the top line due to increase in volumes and associated effects. It is expected that the Turnaround plan will show effective results by the end of the fiscal year,” Butschek said.
Tata Motors has the widest portfolio in the commercial vehicles segment. Capital expenditure for the next year will see an increase, with the bulk of it going towards BS VI. It launched around 70 products from the overall portfolio perspective this year and will continue at the same rate in the next year.
” JLR has an operating leverage issue compared to the contribution margin issues faced by passenger vehicles in India. Russia, China have been pretty good for JLR. Europe has moved from a position of red to amber. UK remains a challenging market. US remains challenging from the point of view of its traditional cyclicality that is there”, said P B Balaji, CFO, Tata Motors Ltd.
Competitors are increasing prices because of rise in raw material costs. On this, Tata Motors responded by saying that they work to provide the best value to customers for their money, and so are trying to internally cut costs and see to what extent can they absorb them because it is in fact true that apart from raw materials, diesel prices have also been rising tremendously and hence costs are bound to rise. They said that things have been pretty manageable till now, but if the pressure is seen building up, actions will have to be taken. They also said that their focus is not just on the initial discounts that the company offers because a customer who buys a car does not do it solely on the basis of discounts. A critical review of the non-core assets and non-core investments will be made to reduce the debt burden.
“FY18 was certainly a turnaround year for us with significant improvement in operational and financial performance. I am happy to see that we are now delivering on this strategy with strong month-on-month sales growth, with both CV and PV businesses witnessing further increase in market share. The Q1FY19 net revenues is the highest in the history of Tata Motors and the operational profit for Q1FY19 is the highest since Q1FY13. As I look ahead, there could be a few challenges in the short-term particularly in commercial vehicles as the new regulations on axle loads come into effect, but remain positive on the long-term potential of the Indian market and I am confident that Tata Motors is taking the right steps to drive Competitive, Consistent, Cash Accretive Growth.” Butschek said.