Tata Motors through its global Jaguar Land Rover (JLR) franchise is a small yet growing player in the global luxury car (Jaguar) and SUV market (Land Rover). In the India market, it is a leading player in the in the commercial vehicle (CV) market and a very small player in the passenger vehicle (PV) market. Tata Motors is a tale of two cities when one compares the performance of the global JLR franchise with the India business.
Since 2008, Tata Motors has grown the JLR franchise into a global brand from its earlier UK centric positioning. JLR has been refreshing its portfolio and plugging gaps in the various sub-segments on the luxury market. It has done a good job taking on the likes of the Germans (i.e. Audi, BMW & Mercedes).
On the other hand, the India business has been a disappointment. Tata Motors in both the CV and passenger car market have consistently delivered year on year losses in market share. It has not been very successful in handling the heat from the likes of M&M and Ashok Leyland in the CV market. In the PV market, Maruti Suzuki and Hyundai have moved the market away from Tata Motors.
So do we buy the stock?
- We expect JLR to gain market share in the luxury market given its success in taking both the brands global i.e. China, US and Europe.
- We feel quite good about how the Jaguar brand has broadened its offering from the mid luxury ranges (segment D&E) to the lower, entry level ranges (segment A,B & C).
- The Land Rover portfolio looks strong with products positioned in the mid and large luxury sport along with offerings for the mid luxury utility range.
- China will drive the highest incremental growth in the luxury car market. We feel confident that the China JV of JLR will take on Audi, BMW & Mercedes in China.
- We are not very sanguine about the India business, even though the business will continue to turnaround and keep increasing its profitability.
- The CV business will grow in line with the India macro environment and we are concerned that it may continue to lose overall market share.
- The India PV side of the business will look promising with the launch of new cars. However, looking at the mixed response for the Zest, Bolt and Tiago we are not confident of significant market share gains. We are concerned that Tata Motors may at best hang on to or marginally improve the low market share it has.
Where is the margin of safety?
We do not see any significant margin of safety in the India business, unless we see a turnaround in market share for the CV and PV segments. We are not as positive as the ongoing commentary about the India business in the media and views of others analyzing the stock. We would like to wait to see turn around in market share losses before we change our view. We will not build a view based on hope and expectations.
The margin of safety exists and is quite strong for the JLR side of the business. We can imagine the JLR market share moving from around 1-2% to 4-5% in the luxury vehicle market. A 2x change in market share can deliver a significant upside to the stock over the long term.
Both the JLR and the India business will see a large number of launches in the next 2-3 years. It will create a pressure on the cash flow situation in terms of capex, R&D, higher sales and marketing spend to support the launches. We will be watching the cash flow statement of Tata Motors with great interest as a part of the developing story.
Optically the stock looks quite cheap when compared to its peers in the Indian auto industry. However, we compare it to its German peers in the luxury segment. Given the lower market share of JLR when compared to its German peers creates higher opportunities for growth and builds the key driver for outperformance in stock prices movement.
In this note we have not considered speculative if scenarios of Tata Motor selling of its India business as a whole or in parts.