Is Tata Motors going to be Multi-bagger?

When most people talk about Sir Ratan Tata, their minds revolve around the incredible journey and achievements throughout his journey in Tata Group. But among all the incredible things one thing which most people think and go crazy about is the acquisition of Jaguar and Land Rover. Many refer to this acquisition as a compelling tale of revenge. Though it might or might not be the revenge story, one thing is true: Jaguar and Land Rover are changing the landscape of Tata Motors. 

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Tata Motors is an Indian global automobile manufacturer, offering an extensive portfolio of mobility solutions encompassing cars, utility vehicles, trucks, and buses. 

Did you know that Tata Motors started as a locomotive manufacturer back in 1945? Fast forward to today, and it’s a global leader in the automobile industry!  
From locomotives to leading the EV market, Tata Motors has revolutionized Indian mobility.  

In 1954, they teamed up with Daimler-Benz to produce Mercedes-Benz vehicles in India. Imagine seeing a Mercedes on Indian roads for the first time!  

There are 5 business segments in which Tata Motors operate 

• Commercial vehicles  

• Passenger vehicles  

• Electric vehicles  

• Jaguar and Land Rover  

• Tata Motors Finance  

Tata Motors is India’s largest Commercial Vehicle manufacturer, with the widest product and service portfolio across cargo and passenger mobility segments.  

[On screen:] Commercial Vehicle: ACE, Magic IRIS, Xenon  

Tata Motors is the third-largest player in India’s Passenger Vehicle space. Their PV offering includes various body styles and powertrain options of petrol, diesel, and CNG.  

[on screen] Passenger Vehicles: Nexon, Altroz, Bolt, Zest, Safari.  

They are the largest player in India’s EV space. In less than four years, sales have grown approximately to 50,000 vehicles as of the FY23 report.  

Electric Vehicles: Nexon, Tigor  

Jaguar & Land Rover (JLR): This segment is known for its premium vehicles and exceptional driving experiences.  

Examples: Velar, Defender, Jaguar XF  

Industry:  

But any stock’s analysis is incomplete without understanding the industry landscape in which they operate.  

So, what’s going on in the Indian automobile industry? Well, it looks like this industry is no longer just about cars—it’s a barometer for economic health and technological progress. The Indian automobile industry has historically been a good indicator of how well the economy is doing, If income levels of people rise, it will impact on the sales of the automobiles. This is a clear indication of the economic activity. 

The Indian passenger car market was valued at 32.70 billion dollars in 2021, and it is expected to reach a value of 54.84 billion dollars by 2027 while registering a CAGR of over 9% between 2022 and 2027.  

According to the Ministry of Heavy Industries, the contribution of this sector to the national GDP has risen to about 7.1% now from 2.77% in 1992–93. This sector provides direct and indirect employment to over 19 million people.  

In terms of global manufacturing, India stands as the second largest producer of two-wheelers, seventh largest in commercial vehicles, and sixth largest in passenger vehicles.  

With the Indian passenger car market expected to surge to 54.84 billion dollars by 2027, Tata Motors is gearing up for a promising future. 

Now let us break down the revenue of Tata Motors. 

Tata Motors revenue breakdown:  

The consolidated revenue of Tata Motors is INR 3,45,967 crore, of which 

• Commercial vehicles: INR 70,816 crore.  

• Passenger vehicles: INR 47,868 crore.  

• Jaguar and Land Rover: INR 2,22,860 crore.  

• Financing: INR 4,595 crore.  

The company has a presence in several foreign countries as well. Of the total revenue contribution,  

• North America amounts to: INR 54,766 crore  

• Europe generates about: INR 42,731 crore  

• UK contributes: INR 33,141 Crores  

• India being the largest market contributes INR 1,14,091 crore  

• And China: INR 47,368 crore.  

Now that we have understood the expanse of Tata Motors’ business, let’s look into what are their strengths and what are the risks associated with this stock. 

Strengths:  

1. Diversified product portfolio: Tata Motors has a diverse product portfolio base with cars, buses, trucks, and electric vehicles. This diversification of business and revenue from different segments is helping the company grow. Over 140 products and 700 variants were introduced in FY24. So, when a company diversifies its business, there are higher chances of increasing revenues.  

2. Research and Development: Tata Motors has increased its spending on R&D as the company is focusing on extending the electric vehicle product range. Tata Motors has increased its spending on research and development (R&D) by 45% YoY to INR 29,398 crore for the year ended March 31, 2024. The company also spent money in areas such as wireless battery management systems, wireless charging of high-voltage batteries, and the development of vehicle control strategies to improve EV efficiency.   

All these efforts have begun yielding significant results, with 333 patents granted in FY24. Additionally, the company has filed 145 design applications. Jaguar Land Rover (JLR) has also made substantial progress, securing 337 patents and 279 design applications.  

3. Strong brand: Tata is one of the most reputed and respected brands in India and globally. Tata’s long-standing history and legacy in various industries gives extra credibility and stability to Tata Motors.  

4. Large customer base: passenger vehicle sales in India set a record in FY24 with over 4.2 million units sold, driven by SUVs (50% of overall sales) and emission-friendly powertrains. The clientele data can provide Tata Motors with insights on customer behavior, preferences, and trends. This insight is invaluable for making informed strategic decisions, improving the customer experience, and implementing targeted marketing campaigns.  

5. Jaguar & Land Rover Acquisition:  

 
Why did Tata Motors buy Jaguar and Land Rover for a whopping $2.3 billion? Was it just a revenge story?  

Back in 1999, Tata Motors had launched Tata Indica, India’s first indigenous car. A dream project of Ratan Tata’s, the Tata Indica however failed to take off. Due to low sales, Tata Motors decided to sell off its car business within a year of its debut. Ratan Tata approached Ford to sell Tata Motors’ passenger car division. But Ford’s executives mocked Tata, asking him if he knew anything about the passenger car business.  

“Feeling humiliated, Ratan Tata decided to return to India without selling his business. That moment sparked a determination within him. 

However, there’s more to it! 

In 2007, Ford decided to sell JLR. They needed to focus on their core business and stabilize financially. The hunt for a buyer began, attracting private equity firms and global automakers.  

Amidst the contenders, Tata Motors stood out. But why Tata? Their vision, strategy, and global ambitions made them the perfect fit.  

The deal included everything: JLR’s manufacturing plants, intellectual property rights, and extensive sales networks. This wasn’t just a purchase; it was a strategic masterstroke!  

This acquisition didn’t just add luxury to Tata’s portfolio; it revolutionized their global presence and technological prowess.  

So, was it a revenge story? Maybe. But more importantly, it was a game-changing move that redefined Tata Motors’ future. Now that’s strategic brilliance!  

The strategic acquisition of JLR helped the company in many ways.  

• With JLR, Tata Motors not only expanded its product base, but it also entered the luxury car segment. 

• This acquisition helped Tata Motors’ global footprint, particularly in Europe and North America.  

• Tata Motors gained access to advanced automotive technologies, including high-performance engines and four-wheel-drive systems.  

• The JLR division is the highest revenue-generating arm for Tata Motors, as per the FY23 report, at nearly INR 2,22,860 crore.  
   
  So far, Tata Motors seem to be an incredible company, right! However, every business comes with its own risks. As an investor, it is critical that you understand the risks the same way you understand the merits of a stock. 

Risks:  

Supply chain disruptions, semiconductor shortages, and geopolitical tensions—Tata Motors faces it all. 

Supply chain disruptions: Supply chain disruptions can severely impact the business by causing production delays, increasing costs, compromising quality, and affecting sales. Disruptions in logistics, such as port congestion, shipping delays, or transportation strikes, can impede the timely delivery of raw materials and finished products. 

Geopolitical Risks: The company is exposed to several geopolitical risks owing to its diversified geographic presence. Freight charges keep varying based on geo-political issues.  

Semi-conductor shortage: Do you know the biggest risk for the automotive sector today?  

It’s semiconductors.  

In cars, semiconductors are everywhere, from microcontrollers and sensors to electric control units and power management ICs. They’re the heart and brain of modern vehicles. 

A semiconductor has an electrical conductivity value between a conductor and an insulator. They conduct electricity under certain conditions, making them crucial for controlling electrical signals.  

India depends entirely on imports for semiconductors from countries like China, Singapore, Hong Kong, Japan, and the US. We spent a staggering 2.38 billion dollars in imports in 2022 for 100% of our semiconductor requirements. 

This heavy reliance brings significant risks, from supply chain vulnerabilities to cybersecurity threats and integration challenges. The automotive sector is at the mercy of semiconductor availability.  

Without a stable semiconductor supply, the future of automobiles looks uncertain. We need sustainable solutions to safeguard this critical sector.  

Tata Motors is also at risk due to this Semi-conductor shortage. 

Financials of the company:  

Tata Motors seems to be on the road to recovery with sales growth and profit improvement. However, investors should be aware of potential risks and constantly monitor performance and market conditions. If the company continues to manage its costs effectively and capitalize on growth opportunities, it could present a strong investment opportunity.  

Shareholding pattern:  

If we look at the shareholding patterns of the company, Tata Motors’ shareholding trends tell an engaging story. With promoters and institutional investors steadily increasing their stakes, there’s a clear vote of confidence in the company’s future. The rise in retail shareholders reflects growing public interest and excitement. This shift not only underscores Tata Motors’ strategic appeal but also positions it as a company to watch closely in the market.  

So, what could be the significant Growth Triggers for Tata Motors going forward? 

• FAME Policy: Do you know what is the FAME India Policy? FAME India is an incentive scheme that encourages the adoption of electric and hybrid vehicles. The full form of the Fame India scheme is “Faster Adoption and Manufacturing of Electric and Hybrid Vehicles in India.” Phase-II of FAME was implemented by the Ministry of Heavy Industries for a period of five years commencing on April 1, 2019 with a total budget support of Rs. 10,000 crores. This phase mainly focuses on supporting the electrification of public and shared transportation and aims to support, through demand incentives: 7,090 eBuses, 5,00,000 e-3 Wheelers, 55,000 e-4 Wheeler passenger cars, and 10,00,000 e-2 Wheelers. In addition, the creation of charging infrastructure is also supported under this scheme.  

• PLI Scheme: The government approved the Production-Linked Incentive (PLI) Scheme for the Automotive Sector with a budgetary outlay of INR 25,938 crores to support domestic vehicle manufacturing on September 15, 2021. Electric vehicles are also covered under this PLI scheme.  

• Growing Income Levels: Rising income levels will boost the demand for automobiles due to an increase in the purchasing power of people. With rising incomes, people aspire to improve their quality of life, and owning a car is often seen as a status symbol and a significant lifestyle upgrade.  

• Growing demand for EVs: The demand for EVs is on the uptrend. The global EV market was estimated at approximately $250 billion in 2021, and by 2028, it is projected to grow by five times to $1,318 billion.  

• After-sales revenue growth: The record sales growth of tata motors would also bolster their after-sales revenue.  

Environmental Social Governance Analysis:  

Environmental:  

• Net zero by 2045: Tata Motors has set a target to become net zero in the passenger vehicles segment by 2040 and in the in the commercial vehicles segment by 2045. Tata Motors is also planning to run on 100% renewable electricity by 2030.  

• ProLife initiative: Tata Motors has launched the ProLife program to extend the life of vehicle components such as engines, clutch plates, discs, and cabins. This initiative involves re-manufacturing these parts to make them as good as new but at a fraction of the original cost. Additionally, using these remanufactured parts improves fuel efficiency by 5–10% compared to older parts. This is a good news for everyone who owns a Tata Motors vehicle. 

Social:  

• Diversity and Inclusion: Tata Motors has appointed Anuradha Das as its first Chief Diversity Officer to enhance its diversity and inclusion. As per the FY23 report, a total of 4,987 women were employed by the company. The company is taking actions to have a 30% female workforce by 2030.  

• Pragati program: Pragati is a higher education initiative by Tata Motors aimed at technician-grade employees in its plants. The program partners with institutes to offer a Diploma in Engineering, specifically focusing on Auto Electrical and Electronics.  

• Tata Motors spent INR 3.38 crore on the Arogya Program. Arogya is a health initiative for the community that addresses malnutrition in children between the formative ages of 0 and 6 years. A total of 5,31,137 people benefited from the program.  

• Tata Motors spent INR 3.9 crore on the Kaushalya program, which has benefited over 28,896 people. Kaushalya is a skill development program for unemployed youth, offering training in auto trade, non-auto trade, agriculture, and allied activities.  

Governance:  

• 67% of the board is comprised of independent directors.  

Singur Land Acquisition Issue  

In 2006, Tata Motors acquired land in Singur, West Bengal, to build a plant for their Nano car project. The acquisition led to widespread protests and legal challenges, spearheaded by Mamata Banerjee’s Trinamool Congress, which argued that the land acquisition was forced and unfair to local farmers. Due to the intense opposition, Tata Motors decided to relocate the plant to Sanand, Gujarat, in 2008.  

In 2016, the Supreme Court of India ruled that the land acquisition by the West Bengal government was illegal and ordered the return of the land to the farmers. Following this, Tata Motors sought compensation for the losses incurred due to the stalled project and relocation costs. A three-member arbitral tribunal awarded Tata Motors ₹765.68 crore plus interest for these losses.  

Additionally, Tata Motors faced allegations in 2021 that the company coerced its dealers to offtake vehicles according to the company’s demands. This case was closed by the Competition Commission of India in 2023.  

Conclusions:  

Tata Motors’ journey exemplifies not just resilience but also strategic foresight in navigating industry challenges. Despite supply chain disruptions and semiconductor shortages, the company has maintained robust financial performance and is actively reducing its debt burden. This dual focus on financial stability and product innovation underscores Tata Motors’ commitment to sustainable growth and adaptation in a rapidly changing automotive landscape. As it continues to innovate and optimize operations, Tata Motors appears poised to capitalize on future opportunities in the global market.  

Disclaimer:  

Savart is a SEBI-registered investment advisor. The purpose of this content is to educate, not advise or recommend any particular security. Investments are subject to market risks. Please conduct thorough due diligence or seek professional guidance before making any investment.