Tata Motors's Silent Death

Tata Motors (TTMT) is India's largest commercial vehicle player and fourth largest in the passenger vehicle market with products in compact and mid size cars and utility vehicle segments. The company has operations in the UK, South Korea, Thailand and Spain through subsidiaries and associate companies; amongst these is the Jaguar Land Rover business, which comprises two iconic British brands – Jaguar and Land Rover. TTMT’s cars, buses and trucks are being marketed in several countries across Europe, Africa, the Middle East, South Asia, South East Asia and South America.

Tata Motors has earmarked Rs 4,000 crore per annum capital expenditure for years 2018 and 19, including commercial vehicle’s Rs 1,500 crore and Rs 2,500 crore for cars, according to an Edelweiss report.

Investment in commercial vehicle business is to refurbish the product portfolio with an eye on regaining market share. In past three years, TTMT has lost 5.7 per cent of its market share. And, it appears little too late as competition has already created its brand presence, making it all the more difficult for TTMT to sustainably regain lost ground. Its major risk in this segment is that despite having a wide distribution network and strong brand equity, the company is unable to stem the loss of market share. This is likely to put pressure on its margin profile over long term, driven by higher support activities.

Investment in passenger vehicle segment – car business – is for the preparation of new platform which is due for launch in 2019. Overall, it is expected that free cash flow is to stay under pressure over the medium term. The success of this platform is a key metric for the company.

The company is overhauling its domestic supply chain, product portfolio and organisational structure as part of three-year strategy. The aim is to put Tata Motors among the top three car brands in India by the end of March 2019. The automaker is rationalising the number of suppliers and will eliminate those that are below the criteria of standard quality, cost and delivery time.

Given the huge capital expenditure and continued pressure on market share, the free cash flow (FCF) generation of domestic business is expected to remain under pressure.

JLR: Product pipeline robust; margin headwinds persist

Jaguar Land Rover’s (JLR) healthy product pipeline and platform consolidation will accelerate model introductions over the next five years. However, headwinds such as aging portfolio, high competitive intensity and insignificant revenue contribution from new launches persist.

New launches within JLR business such as Discovery, Velar and I‐pacewill propel JLR’s volume momentum. However, average discounts are poised to increase as unlike past, new launches are unlikely to be significant revenue contributors and ageing product portfolio generally entails higher variable marketing spend. The increasing average portfolio age for JLR and higher discounting are likely to put cap on margin expansion.

For instance, Range Rover and Range Rover Sportare in fourth and fifth years of life cycles, respectively; Discovery Sportis entering third year and should see higher discounts going ahead.

The key risks JLR business face – given competitive intensity, profitability is expected to lag volume growth. The electric vehicles remain a key event as it is unclear as of now the extent of success all the traditional players are likely to achieve.

The product pipeline of JLR remains robust; however the EBIT growth will trail behind the expectations, thereby affecting estimated free cash flow. The medium and heavy commercial vehicle (M&HCV) market share gains will remain challenging.

At current market price of Rs 447, Tata Motors trades nine times its expected earnings of 2019.

neha.seth@outlookindia.com