Equity analyst Piyush Jain has raised the economic moat rating and the fair value estimate of Tata Motors.
The economic moat rating goes to narrow from none.
Tata Motor's narrow economic moat is supported by the strength of the Jaguar Land Rover, or JLR, brands, which command premium pricing and the cost advantages enjoyed by the company's Indian business arising from low labour costs and favourable tax structure. The company commands more than 50% market share in the Indian commercial vehicle market, where we believe it will benefit from strong economic growth and $1 trillion in government infrastructure spending.
The moat trend rating is now negative, formerly stable. The negative moat trend rating reflects the growing competitive intensity in the Indian passenger and commercial vehicle market, and increasing capacity in the global automotive market. As excess capacity increases, the potential for irrational pricing behavior will also expand, which will eventually threaten operating leverage, profit margins, and excess returns.
Fair value estimate goes up.
Piyush has increased the fair value estimate by Rs 45 to Rs 415 on the shares of Tata Motors that includes robust JLR revenue growth and profitability as well as a recovery in India's economic conditions. JLR enjoys premium pricing as it operates in the luxury vehicle segment, helping to improve consolidated EBITDA margins of the company from 6.6% in 2009 to 12.6% in 2013. Nonetheless, Tata's EBITDA margins prior to acquiring JLR reached a high of 13.4% in 2004.
The standard stewardship rating to Tata Motors has been maintained.
The company's acquisition of JLR in 2008 during the global auto depression that followed the global financial crisis was particularly fortuitous and has proved to be highly profitable. Following the acquisition, the company had carefully exercised cash management and cost controls while working with the turnaround of Jaguar and Land Rover. The company has also consistently paid out dividends in the past decade.
Tata Motor's strategy for the Indian market has disappointed.
For many years, there has been a lack of vision for the Indian passenger business and this is evident from lack of foresight on new models, technology and platform introduction. We believe this was one of the reasons why Tata Motors could not match its rivals over the last three to five years, as new competitors introduced new models in every segment. From a 2008 peak of 26%, Tata Motor's share of the total India vehicle market retreated to 22% by 2013.
The decline in passenger vehicle market share was partly driven by Tata Motors taking longer to introduce new models versus its peers, deregulation of diesel prices compromising its diesel range, and higher growth in motorcycle sales versus passenger car sales in a weak Indian economy. It's commercial vehicle share has also declined, but it continues to retain an industry-leading 53% of the medium and heavy commercial market.
Once the Indian elections are past, we think the planned government spending of $1 trillion on infrastructure will boost the commercial vehicle market and benefit Tata Motor's India business.
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