In our opinion, Tata Motor's third quarter profitability performance was solid, reporting 30 basis points higher than our long term 14.8% EBITDA margin assumption. Overall, the Indian business is steadily improving and Jaguar and Land Rover (JLR) business remains stable.
Owing to a change in Morningstar cost of capital assumptions (Rs 70), increase in Indian vehicle volume growth assumptions (Rs 20) and the time value of money component in our DCF model (Rs 10), we have raised our fair value estimate to Rs 700 from Rs 600 per share. We have increased our five-year forecast for annual Indian vehicle sales volume growth to average 9% from 6% previously. This is driven by acceptance of new model launches in new passenger vehicle segment and a turnaround in heavy commercial vehicle demand. We view this 4-star rated stock as undervalued with the shares trading at a 15% discount to our fair value estimate.
We looked at Tata Motor's expansion of distribution footprints in rural India and the introduction of new JLR and Tata models in new segments as a positive catalyst over the next two years. We are pleased with February Jaguar and Land Rover (JJLR) sales volumes as it largely indicates phasing out of Freelander and imported Evoque inventory in China.
Over the next two months, we should start seeing models from the local China plant starting to sell and will give a better idea of the underlying sales momentum and the impact of recent vehicle recall. However, we believe the new models will be the growth drivers of Tata Motor's stock in the near term and we are positive on the launch of Jaguar XE and Discovery Sport.
Tata's narrow economic moat is supported by the strength of the Jaguar Land Rover (JLR) brands, which command premium pricing and the cost advantages enjoyed by Tata's Indian business arising from low labour costs and a favourable tax structure. Our 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.
