Tata Motors Indian auto business valued lower than its Indian subsidiaries
Analysts estimate the per share value of Indian auto business at `20 per share, the subsidiaries have been assigned a value of `30 a share
It’s well-known that Tata Motors Ltd now derives much of its value from its UK subsidiary Jaguar Land Rover Plc (JLR) and that the company’s Indian business pales in comparison. But it’s interesting to note that the value assigned by some analysts to the Indian auto business is now even lower than that of Tata Motors’ Indian subsidiaries such as Tata Motors Finance Ltd and Tata Technologies Ltd.
Analysts at Ambit Capital Markets estimate the per share value of the company’s Indian auto business at ₹ 20 per share, while they have assigned a value of ₹ 30 a share to the above-mentioned subsidiaries.
Things have hardly ever been worse for the company’s domestic auto business. Apart from sluggish economic growth, the company has suffered a sharp drop in market share; in the passenger car market, the company has struggled because of an inferior product offering.
While the drop in the value of the domestic business has been stark, the rise in the value of the JLR business has been rather dramatic. Ambit has assigned a value of ₹ 500 per share to JLR, or over 90% of the total estimated value of the company, according to the broker. About three years ago, JLR accounted for about 60% of the total value of the firm, according to the same broker’s estimates.
In mid-2009, about a year after the JLR acquisition, analysts at Nomura Research had written, “We believe that JLR may have a negative value of anywhere from ₹ 48 to ₹ 208 per share, which is not being factored in by the market." Back then, JLR was burning cash a brisk pace and the broker’s concerns were warranted.
But in the end, investors have been rewarded for their faith. Tata Motors shares have risen more than four-fold since the time of the acquisition in 2008.
JLR is now generating large amounts of cash and is in a net cash position. The business turnaround happened with the growing share of sales in China in its revenue mix and gradual recovery in developed markets.
Tata Motors stand-alone entity, which posted a huge profit in the year ended March 2008 before the acquisition, is now a victim of the domestic auto slowdown. In 2013-14, it posted a net loss of around ₹ 1,092 crore. From about 60% a year ago, Tata’s market share in the trucks segment is down to around 46% in July, analysts says.
Similarly, competition pressures abound in light commercial vehicle segments and passenger vehicles, which could keep margins down. Losses continue to mount. The stand-alone entity posted an operating loss of ₹ 300 crore for the three months ended June.
Is this the nadir as far as the stand-alone entity’s performance goes? The expected recovery in truck demand can turn things around quickly. After all, the operating leverage in this segment is high. Margins are between 1-2% and can increase to 5-6% with a rise in sales.
Of course, even with such a recovery, the domestic auto business will pale in comparison to JLR, but at least things won’t be as bad as they are now, where much smaller subsidiary arms command a higher valuation.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!