Inside Wall Street: Time to Hitch a Ride With Indian Carmaker Tata

Gene Marcial's Inside Wall Street
Gene Marcial's Inside Wall Street

President Obama's recent three-day state visit to India has put a shine on some of the major companies in that country, with Tata Motors (TTM) leading the pack. Tata is India's leading maker of cars and trucks, and its American Depositary Receipts (ADRs), or shares that trade on the New York Stock exchange, have been on fire. They've hit $30 per ADR, up from $16 last May. A year ago, Tata's stock was languishing at a 52-week low of $11.46. Some bulls are now betting it has some more distance to go.

Wall Street analysts aren't exactly fired up by the auto industry these days, and only two major outfits follow Tata, including EVA Dimensions, which now rates it a sell following the stock's big run-up. However, Standard & Poor's recommends Tata as a buy. S&P analyst Efraim Levy just boosted his price target on it to $39 a share from $32.

Some of the smart-money crowd has already accumulated shares, including BlackRock Institutional Trust, UBS Global Asset Management and Wellington Management. Although many U.S. investors are starting to get warmed up by General Motors' impending initial public stock offering later this month, the strong appeal of Tata is hard to resist, particularly for those seeking to ride the rapid growth in the emerging markets and the upswing in global demand for motor vehicles. For one thing, Tata's sales are going gangbusters.

Rising Volume Should Fatten Profits

"The company will benefit from the long-term uptrend we see in demand for commercial and passenger vehicles in India, as well as growth in Tata's exports," says Levy. He notes that Tata's production for October jumped 51% from a year ago, led by its car output, which has more than doubled. Sales for the month were also robust, increasing 21%, as exports also doubled. The rising sales volume, adds Levy, should help fatten profit margins.

In fiscal 2010, ended Mar. 31, Tata sold 880,396 vehicles, including Jaguar and Land Rover cars, up from 672,747 in fiscal 2009. He predicts the combined sales of Jaguar and Land Rover (Tata purchased the two companies from Ford [F] in June 2008 for $2.3 billion) should grow further in fiscal 2011.

Demand for cars in India has been increasing since 2002, on the back of the nation's rising gross domestic product. The Indian auto industry represents some 4% of national GDP. Total industry sales, including exports, have been in an upswing, totaling 2.48 million in fiscal 2010, up from 1.93 million in the previous fiscal year. Tata's market share has been on a roll as well. The company now controls 25.5% of the four-wheel vehicle market, up from 24.4% in fiscal 2009.

Several Positive Factors

The Indian government's fiscal stimulus program initiated in 2008, which called for spending $4 billion, helped augment vehicle sales, partly because it included the provision of accelerated lines of credit for the purchase of commercial vehicles and depreciation of certain commercial vehicles bought in calendar 2009.

The further jump in Tata's revenues in fiscal 2011 and beyond will be due, in large measure, to several positive factors, including the improving economic environment in India, rising sales in its low-cost Nano small cars and projected sales of new vehicles, including commercial trucks and buses. "We expect new product introductions and vehicle model updates will mitigate pressure on Tata's market share as foreign penetration of the Indian market increases," says Levy.

Levy has raised his earnings estimate for Tata, forecasting it will earn $3.45 in fiscal 2012 ending Mar. 31, from $2.75, and his fiscal 2011 estimate is now $3.27, up from $2.42. Those numbers are way higher than fiscal 2009's earnings of 94 cents. The analyst figures Tata's revenues in fiscal 2011 will increase 24% from fiscal 2010's $19.3 billion. In fiscal 2009, Tata posted revenues of $15.6 billion.

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An analyst at an investment bank in Hong Kong, who rates Tata as outperform but prefers not to be identified, says the stock is undervalued and attractive for multiple reasons, including the uptrend in commercial vehicle sales cycle, ramp-up in Nano production and a strong product pipeline. Tata should benefit the most among vehicle manufacturers in India from the rising trend in commercial vehicle sales because of its dominance in the industry. Tata Motors is the largest member of the Tata Group of Companies that has been manufacturing cars and trucks since 1954.

Indeed, shares of Tata Motors is no longer just a play on the pumped-up demand for vehicles in India and the emerging markets. They're also an opportunity to ride with the company's growth potential in the U.S. With President Obama's fresh diplomatic moves to create deeper ties with India, Tata is expected to be one of the large Indian companies that will benefit from a closer U.S.-India partnership.

For more on stocks that could be good plays on Indian growth, see this Face-Off on Stocks.

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