Fundamental Analysis of Tata Motors: From the glory of its famous trucks to the failure of Nano to $4 billion in losses, Tata Motors has seen everything. The automaker finally posted a profit in FY23 after running into losses for four years.

Has the company put behind its worries? What can the investors of this Tata Group stock expect in the coming quarters? We’ll attempt to answer these and other questions by performing a fundamental analysis of Tata Motors Ltd.

Fundamental Analysis of Tata Motors

We’ll start off our study of the carmaker by getting ourselves acquainted with the business and the scale of its operations. Next, we’ll look in-depth at its various business segments. After that, we’ll equip ourselves with auto industry insights.

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The sections later will race us through the financials of this auto stock. A highlight of the future plans and a summary conclude the article at the end.

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Company Overview

Founded close to 8 decades ago in 1945, Tata Motors Ltd. (TaMo) is the largest commercial vehicle manufacturer and one of the top three passenger vehicle manufacturers in India. It is part of the salt-to-software conglomerate the Tata Group which holds a 46.4% promoter stake in the company.

Tata Motors is also referred to as the Tata Motors Group because of its large scale of operations. It has operations spread across India, the UK, South Korea and South Africa through its 86 subsidiaries, 10 associate companies, 4 JVs and 2 joint operations. As of the writing of this article, its market cap stood at Rs 1,88,500 crore.

In total, TaMo owns 19 production facilities and 7 engineering & design centres. Its product portfolio includes medium and heavy commercial vehicles (M&HCV), light commercial vehicles (ILCV), small commercial vehicles (SCV) & pickups, buses & vans, light passenger vehicles, SUVs, luxury passenger vehicles, and electric vehicles.

Tata Motors houses some of the best-known brands in the automobile industry including Jaguar, Land Rover, Nexon, Harrier, Ace, and more.

It has grown organically and inorganically over the years acquiring prominent companies like UK’s premium car producer Jaguar Land Rover and South Korea’s Daewoo (CV manufacturer). 

Tata Motors Problems

However, the carmaker ran into serious financial troubles in the last few years because of its overpriced acquisitions and dampened sales. It posted huge losses wiping out its equity base and pushing the company to the brink of bankruptcy. 

However, it has made a strong comeback with cost controlling and back-to-back hit launches across various segments. As a feather in its cap, the company controls a whopping 81.4% of the fast-growing PV EV market in India with its top-selling models such as Nexon EV and Tiago EV.

We got a good understanding of the company. Let us learn about its various business segments for our fundamental analysis of Tata Motors.

Segment Analysis

Broadly, TaMo organises its business into four segments for reporting purposes:

  1. The commercial vehicle is the second largest sub-segment for the automaker under which it sells buses, trucks and other such commercial vehicles of different sizes.
  2. Passenger vehicles range includes SUVs, hatchbacks, sedans, EVs, and cars for fleets. 
  3. The vehicle financing segment holds two NBFCs through which the group provides financing for new vehicle purchases, dealer/vendor business and used vehicle refinancing/repurchases.
  4. Jaguar Land Rover is the largest division of the company through which it sells premium cars and SUVs. China, Europe and North America are key markets for JLR.

The table below presents the operating revenue of different segments of Tata Motors.

Operating SegmentFY19FY20FY21FY22FY23
Commercial vehicle58,13736,32933,10452,28770,816
Passenger vehicle14,47010,48216,60631,51547,868
Vehicle financing3,7004,2954,4904,5854,595
Jaguar Land Rover223,514208,040193,823187,697222,860
(figures in Rs Cr)

We can learn from the figures above how JLR, which is the largest sub-segment for the company lost traction from FY20.

It is only recently in FY23 as its operating revenue has reached close to FY19 levels. Let us now move forward to understand the auto industry landscape for our fundamental analysis of Tata Motors.

Industry Overview

The global automobile industry registered negative growth in the last few fiscals because of a variety of factors including general economic slowdown, Covid-19 led pandemic, supply chain disruptions, and shortage of key components.

The production of light vehicles (LV) fell to 76 million (Mn) units in FY22 from 92 million units in FY19 to 76 Mn units in FY22. During the same period, the production of medium and heavy-duty (M&HD) trucks also registered a marginal decline to 2.2 Mn in FY22 from 2.5 Mn in FY19. 

Various industry research groups project a gradual increase in production for LV and M&HD to reach 94 Mn units and 2.6 Mn respectively.

Talking about the domestic automotive landscape, the sector has been struggling long before the pandemic struck. The production figures from the Society of Indian Automobile Manufacturers (SIAM) for various sub-segments throw light on India’s automotive industry.

CategoryFY 2018-19FY 2019-20FY 2020-21FY 2021-22FY 2021-23
Passenger Vehicle4,0283,4253,0623,6514,579
Growth (PV)nil-15%-11%19%25%
Commercial Vehicle1,1127576258061,036
Growth (CV)24%-32%-17%29%28%
(figures in thousands)

However, the sector bounced back in the last two fiscals registering growth in double digits across different sub-segments.

In the coming fiscals, an increase in disposable incomes, better monsoons, easing of inflation and chip shortages, stability in fuel prices and a general fall in commodity prices will drive the automotive demand growth.

Tata Motors – Financials

Revenue & Net Profit Growth

The sales of TaMo have remained volatile in the last five fiscals. It is only in the recent two fiscals that the company has been able to increase its top line. During the same period, it reported heavy losses on account of impairment in the Jaguar Land Rover & passenger vehicle business and high-interest costs.

The automaker turned profitable in the recent fiscal with a profit after tax of Rs 2,960 crore. The table below presents the operating revenue and net profit/loss of Tata Motors over the last few financial years.

Fiscal YearOperating RevenueNet Profit / Loss
2023342,8752,690
2022275,235-11,309
2021246,972-13,395
2020258,594-11,975
2019299,191-28,724
(figures in Rs Cr)

Let us now move forward to study how the margins of Tata Motors have behaved in recent years.

Profit Margins

The automaker was able to post positive EBITDA margins in past but reported negative net profit margins. Thus, we can say that TaMo’s problems were not regular in nature. Even though the sales were declining, the company was able to produce cars and deliver them to its customers.

In addition to interest costs, its problems arose from the exceptional item of goodwill impairment for its overpriced acquisition of JLR and struggling passenger vehicle division.

The table below presents the EBITDA margin and net profit margin of Tata Motors for the last five years.

Fiscal YearEBITDA MarginNet Profit Margin
202310.70.8
20229.6-4.1
202112.2-5.4
20208.5-4.6
20198.9-9.6
(figures in %)

Return Ratios

The impact of losses of Tata Motors was huge on the shareholders’ equity wiping out the reserves of the company. Its return on equity (RoE) stood close to or more than 20% from FY19 to FY22. It is only in the recent fiscal the automaker delivered a positive return on equity of 5.6%.

The table below presents the return on capital employed (RoCE) and return on equity (RoE) over the last five fiscals. The positive RoCE with negative RoE tells us about the unusually high-interest costs of the company.

Fiscal YearRoCERoE
20236.35.6
20221.6-25.7
20216.1-24.3
2020-0.3-19.1
20192.5-47.9
(figures in %)

Mounting losses of the company significantly changed its capital structure. Let us learn more about this in the next section of our fundamental analysis of Tata Motors.

Debt Analysis

As it suffered losses, the company borrowed more to fund its operations while its equity base kept depleting. Thus, in the previous fiscals, TaMo had very low-interest coverage and a high debt-to-equity ratio. 

In FY19, promoter Tata Sons made a capital infusion of Rs 6,500 crore to support the company financially. The situation marginally improved in the recent fiscal when it reported profits and paid back some debt. The interest coverage ratio of debt to equity ratio of Tata Motors stood at 1.13 times and 2.96 in FY23.

The table below showcases the low-interest coverage ratio and high debt/equity ratio of Tata Motors for the last five financial years.

Fiscal YearInterest CoverageDebt / Equity
20231.132.96
20220.193.13
20211.492.46
20200.041.88
20190.661.68

Future Plans Of Tata Motors

So far we looked at the previous fiscals data for our fundamental analysis of Tata Motors. This section lets us understand what lies ahead for the company and its investors.

  1. The management has earmarked a large investment of €15 billion for the next five years to accelerate electrification in Jaguar Land Rover.
  2. The average revenue per unit of JLR has increased over the last five fiscals signalling a higher realisation in the coming quarters for the company.
  3. The management is targeting a free cash flow of more than €2 billion in the near future and a reduction in debt to less than €2 billion by FY24.
  4. As for its PV and CV business, TaMo is focused on scaling up the EV volumes and increasing market share in international markets.
  5. The company has plans to make the recently acquired plant of Ford in Sanad operational in 12-18 months to increase its production capacity.

Fundamental Analysis of Tata Motors – Key Metrics

We are almost at the end of our fundamental analysis of Tata Motors. Let us take a look at the key metrics of the stock.

CMP₹526Market Cap (Cr.)₹188,500
EPS7.27Stock P/E75
RoCE6.3%RoE5.6%
Promoter Holding46.4%Book Value₹136
Debt to Equity2.96Price to Book Value3.9
Net Profit Margin0.8%EBITDA Margin10.7

Conclusion

Tata Motors has been a successful turnaround story from the house of Tatas. Its stock has generated multi-bagger returns of 600% in three years from the pandemic lows when its problems were most pronounced. However, at the present P/E of 75, the future gains seem to be discounted in the present stock price. 

Do you think TaMo will be able to sustain its growth rate in the coming quarters? What are your opinions on the company? How about we continue this conversation in the comments below?

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