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Tata benefits from growth in global luxury vehicles and commercial vehicles in India.

Morningstar's Take | 23/05/2018
by Richard Hilgert

Investment Thesis

Tata Motors benefits from substantial profitability and returns generated by its premium Jaguar and Land Rover brands. Since fiscal 2009, when Tata acquired the luxury automaker, JLR’s revenue has risen at a compound annual growth rate of 28%, with global volume growing 18%. Over the same period, JLR's EBITDA margin has averaged 12.2% but was 15.7% for fiscal 2016, owing to richer product and market mix driven by new model launches. This drove a respectable 14.5% return on invested capital in fiscal 2014, meaningfully surpassing our 8.5% cost of capital estimate.

Over the past 10 years, competitors have entered the Indian vehicle market and Tata's share has retreated to 13% from a peak of 28% in 2006. The decline is largely due to a drop in passenger vehicle market share. This was driven by Tata taking longer to introduce new models versus its peers, deregulation of diesel prices compromising its diesel range, new competitors entering a rapidly growing market (10% CAGR since 2003), and higher growth in motorcycle sales versus passenger car sales during a period of weak Indian economic conditions. Tata's commercial vehicle share has also declined, but the firm retains an industry-leading 55% of the medium and heavy commercial market. We think the government's $1 trillion infrastructure spending plan has boosted the commercial vehicle market and benefits Tata's India business.

In our view, Tata is positioned to gain from the continued growth in Indian automotive sales and the expansion of luxury markets in emerging economies, especially China. Still, the imperative remains for Tata to keep investing in new models across brands and vehicle platforms. The company also needs to improve on its ability to execute vehicles at world-class quality levels. Quality issues plagued the Nano model, and sales have disappointed. While improving, some JLR products still suffer from perceived poor quality. Growing industry overcapacity and domestic competition, along with capital-intensive operations and the industry's cyclicality, pose serious challenges to Tata's ability to consistently earn returns above its cost of capital.


Risks include economic uncertainty in the United States, United Kingdom, and other European markets, vehicle mix, cyclicality, changing customer preferences, input prices, and supply chain. A shift in the model mix toward smaller vehicles with lower margins could pressure returns on invested capital. Inherent risk in the supply chain is the financing risk where there could be a rise in customer defaults. Nonuniform branding across more than 150 markets could affect the brand image. High operating leverage resulting from high fixed costs affects profitability in response to changes in demand. The company's operations are also subject to fluctuations in exchange rates with respect to the countries in which it operates. JLR's operations in particular have significant exposure to foreign currency movements.

Stringent government regulations related to the environment (including greenhouse gas emissions), vehicle safety, fuel economy and energy security could lead to higher costs such as increased capital expenditure and R&D expenses to upgrade products and manufacturing facilities, having an adverse impact on the company's profitability. The legal and political framework has a considerable impact on Tata Motors' business. Regulations concerning vehicles exhaust emissions, fuel consumption, and safety play an important role. In India, changes in duties and fuel prices affect the demand of the vehicles.

Company Profile

Tata Motors owns iconic brands Jaguar and Land Rover, while offering a broad product line of motor vehicles including micro-compact cars, sport utility vehicles, luxury passenger vehicles and large semi trucks. It holds the largest market share of commercial vehicles in India. Tata's operations include 16 production facilities in nine countries and sales distribution in more than 100 countries on five continents. Tata also operates a financial services business, which supports vehicle sales.

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Bulls Say

  • Tata, as the largest commercial vehicle manufacturer in India, should gain from an upswing in government spending on infrastructure and the long-term growth potential for light commercial vehicles.

  • India's vehicle density per 1,000 people is less than 20, and Tata has the means to meet growing demand in the domestic passenger vehicle market.

  • Jaguar Land Rover will continue to achieve strong international growth. We expect emerging markets to provide significant opportunity.

Bears Say

  • Increased penetration by global OEMs in domestic passenger and commercial vehicles could result in market share deterioration.

  • Stricter environmental laws and greater consumer preference for fuel-efficient vehicles entail higher research and development costs that make vehicles more expensive to produce and sell.

  • Further passenger car market penetration is challenging since motorcycles are the predominant form of personal transportation in India.

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