Tata Motors-A value buy or A value trap?

Over the past few years 1 stock that is on everybody's mind is Tata Motors(TaMo)

Is it a value buy?

The performance of past 5 years speaks for itself

A fall from Rs 422.88 in 2014 to nearly Rs 184.30 in 2019 has trapped a lot of investors!

SO WHAT WENT WRONG FOR TaMo?

Let us first look at the financials.

From 2014 they have faced consistent margin erosion which has led to a significant profit decline.

THE Jaguar-LandRover(JLR) PROBLEMS

JLR which accounts for nearly 90% profits to TaMo has faced a lot of problems

It slumped to a loss in the first half of 2018 amid falling sales, high costs and production freezes.

Some of the challenges JLR is trying to overcome:-

1. Brexit: Britain’s exit from the EU trading bloc at the end of March could cause all sorts of problems for JLR in terms of border friction or even tariffs, depending on what sort of deal is negotiated. A poor deal could wipe a billion pounds (1.12 billion euros) from JLR’s profits, the company says.

2. U.S. tariffs: President Donald Trump has repeatedly threatened tariffs on cars from Europe. Barclays Research described JLR as being “significantly exposed” in a recent report while JLR sources estimate tariffs would cost the company around a billion pounds annually. North America was JLR’s biggest sales market through 10 months of last year, beating Europe and the UK.

3. Quality: JLR has worked to improve the traditionally poor reliability of its cars, but the Jaguar and Land Rover brands still finished second-to-last and last, respectively, on JD Power’s 2018 U.S. quality study.

4. Diesel: JLR believes sales have been hurt by the shift away from diesel in Europe, where 84 percent of JLR’s vehicles are sold with the powertrain.

THE INDIAN TaMo

The India business of TaMo has been in loss for several years now.

Once a dominant player in the Commercial Vehicle Market with 50% market share,they consistently lost market share till 2018.

TaMo is now resorting to heavy discounting to gain back the market share from the likes of Ashok Leyland.

Such discounting is not healthy for the industry as it leads to eventual loss of margins.

In the PV market after many years of reluctance TaMo finally stopped the loss making Nano.They are getting new products like the Nexon or the Harrier.However most products still make a loss!

THE DIESEL PROBLEM FOR BOTH JLR AND INDIA TaMo

Most of TaMo's India product portfolio is diesel driven.Same is the case with JLR which sells nearly 84% of the vehicles in diesel.

Diesel is a polluting fuel than other fuels and as the world becomes more aware of the environmental pollution less and less people will use diesel powered cars.

The change from diesel to petrol could become yet another big problem for TaMo.

THE CASH GUZZLER THAT IS JLR

The debt for TaMo rose from 60,642 crore in 2014 to about 92,923 crore in 2019.A whopping rise of nearly 50%.

To meet the growing demand and bridge the gap in product offering, JLR is undertaking high capital expenditure (capex) towards R&D, product development and capacity creation (engines manufacturing, Slovakia plant). Total capex towards JLR is expected to be around Rs.41,000-42,000 crore (GBP 4 billion) and towards domestic operations around Rs.4,000- 5,000 crore, including support to Tata Motors Finance Limited (TMFL).

The management continues to guide for negative free cash flows.

JLR's transition from diesel to other engine will be a cash guzzler for TaMo.

So What now for TaMo?

All experts are of the view that TaMo is a great brand and the depth of TaMo and the Tata group will eventually turn around the company.

TaMo and JLR continue to face severe challenges like in the British,Chinese and the Indian Market.

Poor condition of the TaMo balance sheet is an existential threat to the company.

A no-Brexit deal will be yet another disaster for the JLR business.

The TaMo management has been talking of a turnaround plan.However the global demand and the toxic environment regarding a Brexit deal and auto tariffs will make any turnaround extremely difficult.

Most of TaMo is JLR and the India business does not have any power to heavy lift the stock. The fundamentals of the company point to severe problems which will take some time to solve!

Disclaimer:-The author of this report is a Chartered Financial Analyst(CFA) from CFA Institute,USA,the views expressed in the above report are personal and at no point should be construed as an investment advise.Please consult your financial advisor before making any decisions.Reproduction of the above report is strictly prohibited.