A STEEP CLIMB AHEAD

Tata Motors is finally looking up. Its domestic business is recovering, but JLR's financials are still in the danger zone. Investors are advised to tread cautiously INDIA'S largest automaker has been in the thick of action in recent months. After under performing the broader indices for nearly two years, Tata Motors has emerged has one of the best performing large-cap stocks in last two months. Its up more than four times from its lows in November 2008 and has more than doubled in last one and half month against 20% rise in Sensex during the period. At its current stock price, Tata Motors' market capitalisation is just 20% away from it's the all time high of around Rs 35,000 crore reached in late 2006.      This put the stock in the limelight, notwithstanding the financial troubles of JLR. Investors have put all their bets on a full scale recovery in the domestic commercial vehicle market segment which could be risky. ETIG digs deeper into the company's finances to clear the air.  BUSINESS  Tata Motors is by far India's largest commercial vehicle manufacturer with over 60% share of the domestic market. The company's strength lie in its wide product portfolio that covers every segment and niche of the domestic commercial vehicle market right from sub-one tonne goods carrier to tractor trailers with capacity to haul to 75 tonnes of cargo. The company has an equally wide ranging presence in the passenger carrier segment. Through its Korean subsidiary Tata Daewoo Commercial Vehicle Company Limited (TDCV), the company is also the number two player in the S Korea.      The company also rank among country's top three manufacturers of passenger cars and utility vehicles. While in passenger car segment its market share is around 16-17%, it controls nearly a quarter of the domestic utility vehicle markets.  STRATEGIC MOVES  While the last two years has been financially painful for the company, it used the downturn to advance its long-term strategy to emerge as one of world's leading automobile manufacturer. It entered into a manufacturing & distribution joint venture with Fiat in India, besides acquiring Jaguar Land Rover, which gives it foothold in the luxury car market besides access to high end automotive technology.      The company has set up a joint venture in Thailand to tap the growth opportunity in South-East Asia. In 2005, the company acquired 21% strategic stake in Hispano Carrocera S.A. (HC), a well-known Spanish bus manufacturing company and followed it by setting a 51-49% JV with Marcopolo SA, Brazil to manufacture world class buses in India.      Last few years have been equally hectic for Tata Motors engineers who have been busy developing new products. Early this year, the company launched World Series trucks, which will eventually replace Tata's existing fleet of medium & heavy CVs in the domestic market and would become a vehicle for the company's entry in major markets outside India.      In the passenger car segment, the company launched the new Indica followed by the commercial launch of Tata Nano, the world's cheapest car. Though its contribution to Tata Motor's finances is expected to be small initially, Nano has all ingredients to become a cash cow in the longer run.  FINANCES  Tata Motor's finances have been under stress for more than a year now. In the December '08 quarter, company reported its quarterly loss for the first time in nearly seven years. It avoided losses in the following two quarters, but largely due to non-operational income such as profit from sale of assets.      The company's domestic business is now showing signs of improvement with the company reporting a rise in revenues and operating profit (on standalone basis) in the last two quarters. The company's profitability however continues to be in danger from the financial cost related to the acquisition of troubled JLR. In June '09 quarter, Tata Motors reported a net loss of nearly Rs 600 crore on consolidated basis against a net profit of Rs 513 crore on standalone basis. So far there's clarity on JLR finances in the forthcoming quarters.  VALUATIONS  Right now the stock is trading at nearly 24 times its 12 months trailing earnings per share (EPS) on standalone basis. Assuming a full recovery in the domestic CV market, the company is trading at around 15 times its forward EPS for FY10, which leaves little scope for further upside. Besides, the current price does not take into account the risk and uncertainty surrounding the future of JLR. Given this new investors are advised to stay away from the counter while existing investors are advised to book partial profits.      krishna.kant@timesgroup.com