Investment Focus - Tata Motors DVR: Buy :: Business Line

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Brisk business at Jaguar Land Rover (JLR) promises good prospects for Tata Motors, even as the domestic auto industry is likely to continue suffering from the current downturn.

Investors can cash in on this trend by buying the Tata Motors DVR (Differential Voting Rights) stock. The DVR does not entitle investors to voting rights, but pays five per cent more dividend. At Rs 170, the DVR shares are now available at a very reasonable PE of 4.4 times the company’s estimated consolidated earnings for 2013-14. This is at a discount to the Tata Motors shares, which now trades at 8.8 times. Historically, the low float and as a result, lower institutional interest in the DVR has resulted in this sizeable discount. But the gap is expected to narrow as more DVR shares become available for trading. Promoter holdings in the DVR have declined from 84 per cent in December 2008 to less than one percent now. With the holdings changing hands from promoters to domestic and foreign institutional investors, liquidity in the stock has also improved, making a good case for investment at this point in time.

JLR IN FULL STRENGTH

Though Tata Motors’ Indian operations took a beating in the June quarter, robust retail volume growth overseas - thanks to the new Range Rover and the higher-margin Jaguar F-Type and favourable exchange rates helped JLR’s performance. Its revenues and profits moved up by 13 per cent and 29 per cent, respectively, for the June quarter. Operating profit margins expanded by two percentage points to 16.5 per cent.

In the months to come, recent launches such as the Jaguar XF Sportbrake and the XF’s smaller engine options, the Jaguar F Type and the new Range Rover will keep the momentum going. A new Ranger Rover Sport, another high-margin product, has been introduced recently. Besides, JLR also has a strong product pipeline over the next 2-3 years. Considering recent launches, the focus on high-growth emerging markets such as China and Asia-Pacific, and R&D efforts, the company is expected to sustain the good growth. But profit margins may moderate a little with rising spends on product development, facility expansion for new products at Solihull and the trend of increased variable marketing expenses.