Tata Motors DVR: Buy : Business Line

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Prospects for Tata Motors appear rosy, with the Jaguar Land Rover business on a roar, and the domestic auto industry beginning to turn around from the slowdown. Investors can cash in on this by buying the Tata Motors DVR (differential voting rights) stock.

At ₹377, the DVR shares trade at a reasonable 6.5 times the company’s estimated consolidated earnings for 2014-15. This valuation is lower than that of Tata Motors, whose shares now trade at 9.1 times.

Historically, the low float and, as a result, lower institutional interest, resulted in the DVRs trading at 40-50 per cent discount to the Tata Motors stock.

But the discount is narrowing, thanks to improved liquidity. Promoter holdings in the DVR are less than one per cent now.

The shares have instead changed hands to domestic and foreign institutional investors.

Considering that the discount has now come down to about 28 per cent and may close in further, the DVR shares make for a good investment at this juncture. Note that the DVR does not entitle investors to voting rights, but pays 5 per cent more dividend than the main stock.

Even as truck, bus and car sales went through a rough patch domestically, the JLR business kept Tata Motors firmly on the wheel.

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Why buy DVR price at discount to shares Robust product pipeline and favourable market mix at JLR Domestic business set to recover

JLR on fire

In the three months ended June 2014, the company’s consolidated net sales moved up 38 per cent to ₹64,683 crore over the same period last year. Consolidated net profits tripled to ₹5,398 crore, thanks to JLR.

JLR’s retail volumes during the quarter grew by a strong 22 per cent, aided by about 15 per cent growth in the UK and Europe and robust demand from China, where volumes rose 61 per cent.

What also helped was the richer product mix, comprising models such as the new Jaguar F-TYPE, the new Range Rover Sport and Ranger Rover.

Thanks to these factors, JLR’s margins touched a high 20.3 per cent from 15.8 per cent in June 2013. Profit growth was further helped by hedging gains and favourable revaluation of foreign currency debt.

In the quarters to come, the volume growth momentum should continue. For one, the current signs of economic recovery visible in the US, the UK and some European markets bode well for sales in these regions.

Next, though the effect of a low base on volume growth may begin to wane in China, the Chinese auto market is expected to grow faster than global averages. To cash in on this opportunity as well as to take on stiff competition there, JLR is firming up its presence in China through a joint venture (JV).

This JV will begin production in 2015, giving the company an opportunity to compete with local vehicle manufacturers in terms of product offerings and prices. In the first phase, JLR will start production of the Evoque, Freelander and Jaguar XF here.

Finally, the product pipeline is also promising. The Jaguar XE and the Discovery Sport will be unveiled this year and will go on sale beginning 2015.

Marketing spends towards these launches and the launch of the new Ingenium engines, may dent operating margin in the next few quarters.

But JLR’s efforts to slash costs by using shared platforms for its vehicles and higher realisations from new models could mitigate this.

Recovery at home

Back in India, signs of recovery in truck sales bode well for domestic operations, which saw losses at the operating level in the June 2014 quarter.

From 25 per in 2013-14, drop in volumes in the medium and heavy commercial vehicles segment moderated to 8.5 per cent in the first four months of this fiscal.

While increased demand for freight from agriculture and industry should drive trucks sales, bus volumes are expected to get a boost from the JNNURM Phase II orders.

Tata Motors expects the recovery to be strong from the second half of this year. It is gearing for this through new launches in the Prima and Ultra ranges of vehicles.

The passenger vehicles segment too has received a facelift, with the launch of the ZEST.