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In this article, we will do a fundamental analysis of tata motors, we will discuss their business model, how they earn their profits, we will also discuss their valuations also. Recently the stock has fallen a lot we will check its reasons also and at the end, we will decide if its good time to invest in it or not.
Disclaimer: This article is only for educational purposes. I do not recommend buying or sell so please consult your advisor and do your own research before investing.
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Introduction
Tata motors business is related to the automobile industry and they have 2 segments in it. First is the Indian business in which they manufacture commercial and passenger vehicles and second is jaguar and land rover (JLR). In 2019 they got 75% of revenues from JLR while 25% revenues from Indian business.
Tata motors have given 274% returns in the past 1 year to its investors. It is also the 2nd largest auto company in India and the leader in the electric 4-wheeler segment in India. The company is associated with Jaguar Land Rover.
Now we will check the history of the JLR business which is quite interesting. Landrover started in 1885 with bicycle and jaguar name used first time in 1935 in car manufacturing. In 1967 land rover was acquired by the Leyland group of the UK and it got merged with a British corporation. In 1966 British corporation bought a jaguar.
Till 1988 both companies were under British corporation but in 1988 land rover was sold to British aerospace while in 1989 Jaguar was sold to Ford motors. In 1999 land rover was sold to BMW, but due to landrover’s acquisition, BMW posted a loss, and then they sold it to ford group. Ford group also suffered losses due to the acquisition of Jaguar and land rover and then sold to Tata motors and till now both companies are part of tata motors.
In 2017 Mr.Chandrashekhar was appointed as chairman of tata motors apart from tata motors he is also chairman of tata global beverages. Previously he was CEO and managing director of TCS and his TCS grew well. Apart from this he additional director of the tata sons board.
Fundamental Analysis of Tata Motors
Fundamental Analysis of Tata Motors are as follows:
Business Model of Tata Motors
Now we will discuss in detail Tata Motors’ business model, as I mentioned to you they get revenues from 2 segments one in the Indian domestic business and another in JLR which is the premium cars segment. Now we discuss in detail JLR. In JLR they have 2 brands one Jaguar and another is Landrover. In Jaguar brand they manufacture sports car type of premium cars and they manufacture different cars like XF, XE, XJ, F-type, ipace, and epace.
Ipace is their electric car and there is good demand for it. As you will see in Q3 2019 there were good sales for I-pace and this car received different awards also. While in the landrover segment also they have different premium SUVs like discovery sport, range rover, RR sports, RR evoke, velar while Discovery sports is the highest-selling model and there is good demand for this model.
They get revenues for JLR from all over the world but most of the revenues they get are from Europe, UK, North America, and China. In 2019 they got 24% revenues from North America and they have an 8% market share for Jaguar in North America and Landrover demand is also good.
They have a total of 9 plants for the manufacturing of JLR and most of the plants are in the UK. In 2018 they sold 1.5 L cars in china but in 2019 they sold only 98,000 so their total volumes were reduced by 52,000 or 34% there are different reasons for it we will discuss them in some time.
Domestic Business in India
Now we will discuss their domestic business in India. In this business, they have 2 segments one is commercial vehicles and another is passenger vehicles. In the CV segment, they manufacture different capacity trucks and buses. They have a 45% market share in this business but as you can see after 2010 their market share got reduced significantly. While their passenger vehicles segment is not profitable yet and most of the revenues and profits for domestic business are coming from commercial vehicles. CV contributes 78% of total Indian business revenues while the remaining 22% are contributed by Passenger vehicles.
So this passenger vehicle is a small segment. They have different cars in this segment. Harrier and Hexa are their recent launches in this segment and harrier got a good response from the market.
- Tata Motors is one of the big three crown jewels of the $318 billion Tata Group along with TCS and Tata Steel.
- It was founded in 1945 as Tata Engineering and Locomotive Company (TELCO) by JRD Tata.
- TELCO was established to be a manufacturer of locomotives or train engines.
- The company entered the commercial vehicle segment in 1954 through a joint venture with Daimler Benz.
- Tata Motors continued to dominate the heavy commercial vehicle segment in India right till the 90s.
- In 1991, Tata Motors launched its first passenger vehicle which was the Tata Sierra.
- It launched other models like Tata Sumo & Tata Safari which were some of the most well-known cars sold by the company.
- Tata never looked back and made a good penetration in the passenger segment in terms of market share.
- Tata Motors saw a dream to develop the cheapest car in the world which is Tata Nano which was initially sold for $2500 or Rs 1 Lac at the time.
- Tata Motors also made many international acquisitions over the years to expand its business abroad and to enter new markets.
- It acquired South Korean brand Daewoo’s truck unit and the Spanish bus.
- The most famous acquisition of Tata Motors to date has been Jaguar Land Rover.
- TML acquired JLR from Ford Motor in 2008 for $2.3 billion. It is one of the world’s well-known luxury car brands, China being an important territory.
- Tata Motors entered into the electric vehicles space where its sales increased in recent times.
Operations of Tata Motors
- Talking about Tata’s operations so Tata Motors now operates in over 125 countries.
- Nearly 80% of its sales come from JLR. Among the rest, the CV segment is the largest at nearly 13% of sales.
- While the passenger segment accounts for less than 7% of sales.
- Whenever we talk about investors, they want to know in detail about revenue from different segments like jaguar land rover.
- This will dictate how the company will perform on the way ahead.
- The way the company will perform, the share price will move accordingly.
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Detailed Analysis of JLR Business
Now we will discuss the financials of JLR. As I mentioned they get 75% of their revenues from JLR only. As you can see here from last 2-3 years their profits in JLR segment reduced significantly and in 2019 they posted a loss and EBITDA margin also got reduced and in 2019 it was 8.2% as JLR segment got affected due to that whole tata motors group margins reduced. There are different reasons for that and we will now discuss them in detail.
The first reason is due to Brexit as most of their plants are in the UK and there is political uncertainty and due to this their sales got affected in this region. Apart from this in Europe diesel cars demand got reduced as customers are moving toward electric vehicles and 90% of JLR sales are diesel cars so due to that their sales got affected. China also they are facing a lot of problems due to the trade war and in 2018 they sold 1.5 L cars while in 2019 is reduced to 98,000 units so there is a reduction of 34% which is affected margins and revenues.
Apart from this in Q3 2019 tata motors booked a huge loss due to Impairment. The meaning of Impairment is they did some investments in China and rest of world in diesel portfolio but now most of the car manufacturers are turning to electric vehicles and management recognized this is not a good investment and due to that they decided to book loss. Another reason for this is, there is huge depreciation due to those assets which were reducing profits so as they sold these assets in the future this depreciation will reduce which help tata motors group.
In FY 2020-21 income from operations including finance revenues decreased by 4.3% to 2,49,795 crores in FY 2020-21 from 2,61,068 crores in FY 2019-20. This decrease was mainly attributable to lower sales volumes from both Tata Motors and Jaguar Land Rover and partially offset by a favorable currency translation from GBP to INR and an increase in average selling price per unit under BS-VI norms.
The net loss (attributable to shareholders of our Company) was 13,451 crores in FY 2020-21, compared to a loss of 12,071 crores in FY 2019-20. In FY 2020-21 we have taken a charge of 14,994 crores for our Jaguar Land Rover business due to the Reimagine strategy, reversal of impairment charge and onerous contract of1,959 crores, as against provision of 2,549 crores in FY 2019-20 for our passenger vehicle business of Tata Motors Ltd. Excluding the exceptional items, profit before tax was 2,908 crores in FY 2020-21, compared to a loss of `8,709 crores in FY 2019-20, attributable to better product mix and cost reduction measures.
Jaguar Land Rover has been an iconic British brand in the past and under Tata Motors they have seen a rise in global popularity. JLR has made the successful transition from old-world car brands to modern and technologically advanced auto brands worldwide.
Since Tata has acquired this company, the company has seen good sales growth and a few hiccups have been seen as well. Jaguar is aiming to become an all-electric brand and all models from JLR will be available in the electric configuration. In the future, how successful it becomes, you should look at it as an investor.
JLR is running a company transformation strategy called “Reimagine” Here they are reimagining the brand and want to change the positioning and technology wholly. As per the luxury segment, where the company wants to establish.
In the above figure the specific focused areas of the company like brands, products, architects, power train, collaboration, footprint & re-focus.
From this, you can know the JLR’s strategy and aim to focus differently to increase its market share.
Tata Motor’s Indian business detailed analysis
Now we will discuss the financials of Tata Motors’ Indian business. As I mentioned to you earlier there are 2 segments of Indian business:
- Commercial vehicles.
- Passenger Vehicles.
So Indian business contributes 25% revenues while commercial vehicles contribute 78% revenues of Indian business and remaining are contributed by passenger vehicles.
A commercial vehicle is a profitable business while the passenger vehicle segment is still a loss. If you will check here their total profits are revenues are grown in last 2-3 years and company declared 2.0 version of tata motors, so management is successful in turning around Indian business and EBITDA margins also they improved a lot.
But in this segment also there were a few problems, as I mentioned in the Ashok Leyland video government increased the total limit of truck capacity by 20% and due to that demand for trucks got reduced. Apart from this, there was an NBFC crisis and liquidity crunch while affected CV and PV business. Apart from this infra sector also slowing down due to which the CV segment got affected.
But I think their Indian business is good, they have good market share in CV segment and in PV also they launching new cars and harrier got a good response. But problem is that Indian business contributes only 25% of revenues.
But I think their Indian business is good, they have good market share in CV segment and in PV also they launching new cars and harrier got a good response. But problem is that Indian business contributes only 25% of revenues.
Commercial Vehicles
- After JLR, let’s talk about Commercial Vehicles. This is an important segment for the company where it gets 13% of its revenue.
- Tata Motors is the undisputed leader in the commercial vehicle market.
- The company has a market share of 40.5% in the overall CV market.
- 62.7% in the MHCV segment and 52.3% in the ILCV segment.
- That is, the company’s market share has increased in the commercial segment and has focused on this segment to increase its market share.
- The CV industry has been through some tough times due to the BSVI transition.
- Due to BSVI, the companies had to bring about many changes to fit in their complaints, and costs increased.
- But Tata kept its focus on it and brought many changes. In the commercial segment, it wanted to implement its electric strategy.
- The company is already selling electric buses and is expected to launch electric which you should monitor.
Passenger Vehicles
- Tata Motors has been the leader in the commercial vehicle market in India, it has never been able to replicate this success in the passenger vehicles market.
- Although Tata Motors has brought models like the Safari, Sumo, it has not been able to get as much success as other players in the market.
- In the passenger vehicle segment, Nano was an aspirational project where the company wanted to sell cars within 1 lac.
- But the project wasn’t successful the way it was expected.
- Now we talked about the past where Tata didn’t improve its passenger segment in the past but recently Tata took a technological shift.
- Tata has launched a few products in this segment making it improve its share in it.
- Like you can see on my screen, these are a few launches and they have acquired a good market share as well.
- Overall Tata Motors’ strategy to improve its market share has been seen in the passenger segment as well.
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Key Risks of Tata Motors
- Now let’s talk about the Risks Associated with Tata Motors which should be addressed immediately.
- Before investing, you should focus on these points.
Overdependence
- The first is Overdependence on JLR. Over 75% of sales for TML come from JLR.
- Thus, the company is very vulnerable to any risks arising from JLR.
- Bad performance in China will impact the company’s sales thus affecting its share price.
- So in the future, how the company diversifies this risk and reduces its dependency on JLR to other segments will be important.
Supply Chain
- The second is Supply Chain Shocks. You must have heard that due to a shortage of semi-conductors many industries were impacted.
- The auto sector was one of them which got affected immensely due to chip shortage.
- If in future other shocks come which will impact company’s production, how it will address them will be important for you to see.
- As it will affect the company’s supply, then production will thus affect the sales price.
Large Debt
- The company has Large Debt. For acquisitions, the company took a lot of debt.
- The company has huge debt currently and the company’s long strategy is to become debt-free.
- How the company reduces its debt, you should see clearly.
KEY FINANCIAL RATIOS
The details of significant changes (25% or more) in the key financial ratios in FY 2020-21 compared to FY 2019-20 is as follows:
Interest coverage ratio
- In FY 2020-21 Interest coverage ratio has been increased which is 1.10 as compared to the previous FY 2019-20 which is 0.04.
- The formula used to calculate the Interest coverage ratio is (in times) EBIT / Interest expense.
Reason for change
Due to higher Earnings before other income (excluding Incentives), finance costs, foreign exchange gain/(loss) (net), exceptional items, and tax at both Tata Motors and Jaguar Land Rover, in FY 2020-21 compared to FY 2019-20, the interest coverage ratio is high.
Debt to Equity Ratio
- In FY 2020-21 debt to equity ratio has been increased that is 2.46 as compared to previous FY 2019-20 that is 1.88.
- Formula used to calculate debt to equity ratio is Debt (excluding leases)/shareholders’ equity.
Reason for Change
- The consolidated gross debt has increased by 14.4% in FY 2020-21 compared to FY 2019-20. The net debt (net of
cash and cash equivalent including bank balances, mutual fund and deposit with financial institution – current) equity
ratio is increased by 7.3% to 1.25 as at March 31, 2021 compared to 1.16 as at March 31, 2020. - Equity attributable to shareholders of Tata Motors Limited decreased to
55,247 crores as at March 31, 2021, compared to63,079 crores as at March 31, 2020. - This decrease is mainly due to losses of
13,451 crores and actuarial losses in pension reserve of5,901 crores, offset by hedging reserve gain of4,147 crores, currency translation reserve gain of3,853 crores and securities premium of 2,556 crores pursuant to conversion of share warrants.
- As you can see, Tata Motors’ market capitalization is 172,390 crores.
- Debt to equity ratio is 2.57 i.e, the company has a huge debt.
- Return on Equity is -22.9%. Operating profit margin is 12.96% which is not quite good.
- 5years sales have been almost constant around -1.76%. 1-year return to its investors is 271.69%.
Valuations of Tata Motors
Now we will discuss the valuations of tata motors. To value any stock we should know about free cash flows.
What is Free Cash Flow?
- Free cash flow means after all my expenses whatever amount is remaining with me to utilize.
- So there can be different expenses like raw material, payment of workers, electricity payment or new expansion.
- IF you will subtract all these expenses from operating cash flows then you will get free cash flows.
As you can see here tata motors free cash flows. In FY 2019- 20, their cash flows are negative and it is due to impairment of 27000 cr they took in Q3 2019.
Conclusion
I have doubts about their JLR business as it is not performing well and there are negative cash flows from that business apart from this there are problems in China and Brexit in the UK. So due to this demand got affected and JLR is pulling down the whole group.
Their Indian business is fine but its contribution is revenues is not significant. After the financial numbers, and before finishing this article, I would like to say that about 2-3 factors which you should look into before investing.
First, its debt. Second, its strategy for electric vehicles and how it implements and how it grows its market share.
I hope you liked this article. If yes, then comment whether you should invest in Tata Motors or not.
Also, comment on the reasons so that our readers can learn from them.
Happy investing.
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