Tata Motors revving up its domestic business

Favourable response to launches, recovery in CVs will aid growth

Tata Motors'scrip has gained eight per cent over the past fortnight, on expectations of a revival in the domestic business and strong volumes by Jaguar Land Rover (JLR). Aided by a strong showing in China and key developed markets, JLR's 17 per cent year-on-year (y-o-y) volume growth in June helped it to outperform its European luxury car peers.

The Street, however, is keeping a keen eye on domestic market, where the company has been struggling to sell its commercial (CV) and passenger vehicles (PV). It is banking heavily on its new petrol engine, to power its coming launches, the Zest sedan and Bolt hatchback.

  While economic slowdown has hurt CV sales, lack of new products and poor customer perception have impacted PV sales. From a peak of 12.1 per cent market share four years earlier and annual sales volume of 330,000 in FY12, the company's PV market share is down to seven per cent and volumes in FY14 were at 176,000. The Zest and Bolt launches, after a gap of six years, are expected to arrest this slide. The two new models, according to JPMorgan, can add to 20-40 per cent to car sales. Consider the Zest sedan, expected to be launched next month. A 10 per cent share in the 300,000 compact sedan category could add 30,000 to the volumes. A good response to the Bolt could have a similar effect, say analysts. In June, the company sold 8,000 units of PVs and UVs.

In CVs, analysts at Motilal Oswal Securities say, after two years of weakness, freight rates in are up 12-14 per cent y-o-y, reflecting a pick-up in economic activities. Rising fleet operator utilisation and the recent railway freight rate rise should support road freights. Any reduction in interest rates (likely towards end-FY15) will provide additional trigger.

With the domestic business poised for a recovery and JLR expected to maintain growth momentum and improve margins on a richer product mix, most analysts have upgraded their FY16 earnings per share estimates for Tata Motors. With the company expected to gain market share in PVs and maintain its share in CVs, HSBC analysts believe the domestic business contribution to consolidated earnings will to increase to 10 per cent in FY16, compared with a loss in FY14. Analysts have also started giving a higher multiple of 8.75 times to the domestic business, from the historic eight times enterprise value/Ebitda (earnings before interest, taxes, depreciation and amortisation). A majority of analysts have a 'buy' rating on the stock, with a consensus target price of Rs 493. Successful launch of its new cars could put the domestic business and valuations in a different orbit.