Tata Motors: A Bumpy Ride

By Priya Nigam

Over the last 12 months, Tata Motors shares have been acting like my daughter on a sugar high. Jumping up and then sliding down in the blink of an eye. Tata Motors is part of the Tata Group, which is India’s largest private sector conglomerate with companies like Tata Steel, Tata Chemicals and Tata Power under its umbrella.

Tata Motors has recently been in the limelight for its Nano. India's largest carmaker unveiled the Nano (also known as “the people’s car”) at the Auto Expo held in the capital earlier this year and then in Geneva earlier this month. Priced at Rs1 lakh, the car seems to have huge sales potential. On one hand, the car targets the market that would have otherwise purchased a motorcycle. Although a premium motorbike would cost only half as much as the Nano, people may go that extra mile to get into a four wheeler. On the other hand, the four-seater minicar would be an attractive buy for those who would have otherwise bought the Maruti 800 (the cheapest car after the Nano). And to top it all, the Nano promises a mileage of 24kms for every liter of fuel. While all this is good news, the fact remains that the sales of the car would have to break speed limits to ensure profitability.

Meanwhile, Tata Motors has entered the final stages of talks for taking over the Jaguar and Land Rover brands from Ford. The company plans to raise Rs4,000 crore to part finance its expansion and acquisition activities. Tata Motors said it would raise this money via the “issue of appropriate securities in foreign or domestic market.” The company added that it has major plans for expanding its position in India and abroad in the commercial vehicle as well as the passenger vehicle segments. Tata Motors aims to achieve this through upgrading and enhancing its product portfolio, expanding its domestic manufacturing facilities and making strategic acquisitions. While the potential deal with Ford is resulting in a jump in Tata Motors’ liabilities, there is also concern over how smoothly and effectively the company would be able to integrate the British luxury brands. Nonetheless, a confirmation of the deal with Ford may be only days away.

Tata Motors’ earnings growth has slowed and its margins have been under pressure. While the company is facing an upturn in raw material prices, demand is also being affected by interest rate hikes.

Domestic car sales were lackluster last month. Tata Motors reported total sales of 54,181 vehicles (including exports), which was almost flat versus the February 2007 figures. March is likely to be better, with the Budget’s 4% reduction in excise duty on small cars (small cars account for nearly 70% of new car sales). Tata Motors responded to the reduction in excise duty by joining its peers Maruti, Hyundai and General Motors in announcing price cuts.

So, Tata Motors’ earnings growth has lost its recent momentum and profits from the Nano appear questionable. Moreover, the company faces integration challenges. However, the carmaker addresses a huge and growing domestic market. One thing is for sure, Tata Motors shares are not for the faint hearted.