Equity Valuation of TATA Motors

Agenda
Fundamental Analysis
Introduction to TATA Motors Global Overview Domestic Overview Company Analysis Current financials Past performance Future plans

Equity valuation
Estimated future growth (calculation of g) Expected return on equity (CAPM Analysis k ) Calculation FCFE Intrinsic Value Conclusion

TATA Motors Ltd

Founded: 1945 Founder: JRD Tata Headquarters :Mumbai, India Key people: Ratan Tata, Chairman Parent: Tata Group Subsidiaries: Jaguar Cars Land Rover Products: Automobiles and Engines Revenue : USD 9.07 billion (2006) Net income: USD $474.0 million (2006) Tata Daewoo Website: http://www.tatamotors. com/

TATA Motors At-a-Glance

Tata Motors Limited is India's largest automobile company, with revenues of Rs. 32,426 crores (USD 7.2 billion) in 2006-07. It is the leader by commercial vehicles in each segment. The company is the world's fifth M&HCV manufacturer, and the world's second largest medium and heavy bus manufacturer. Annual turnover of over Rs 108 billion. The company has manufacturing plants at Jamshedpur, Pune and Lucknow, Bangalore, Chennai, Noida, Uttaranchal & Singur, & have many more manufacturing & R&D units abroad.

Global Automobile Industry

Asian Automobile market Growth rate

Growth potential at Global Level

India is on every major global automobile player's roadmap. See why? 4th largest commercial vehicle market in the world. 11th largest passenger car market in the world. expected to become the 7th largest by 2016.

Growth Potential at Domestic level

Sales of passenger cars in India is likely to grow at an average of 14.9% each year to touch the 2.1 million mark by 2010!

Increase in automobile Purchase Trend

Growing working population Increased access to credit and lower interest loans Increased consumer embrace of financial products Upward migration of household income levels Fast paced urbanization to rise from 28% to 40% by 2020 Middle class expanding by 30 - 40 million every year

Stunning Growth Rates! India

Passenger car sales grew by 10.84% and crossed the 1 million mark in 2006-07 and record sales of 1,076,408 vehicles. Utility vehicles sales grew by almost 12.2% in April-May 2007 and this segment is expected to grow at 20% by 2010.

Multi purpose vehicles sales grew by almost 21.93% in April-May 2007 compared to the same period last year.

Expected Growth by 2015-16

Potential Vehicle sales in India in 2015 - 06 ( in mn)

0.87 27.8 2015-16 0.64 2.65

0
Cars CVs

10
Two wheelers

20
Three Wheelers

30

Expected to grow at 13% p.a over the next decade to reach

around USD 120 - 159 bn by 2016.

Exports Potential to become the Global Outsourcing Hub

Export of auto compone nts (USD million )
1,800
25%

1400 760 1020

456

625

578

FY00

FY01

FY02

FY03

FY04

FY05

FY06

Indian vehicle exports- over 40 % over the last few years,

while Component exports -25 % per annum. Key exporters include:

Tata Motors , Ashok Leyland, Maruti, M & M and Hyundai

Government Regulations & Growth

Allows automatic approval for foreign equity
investment upto 100% in the automotive sector.

Weighted tax deduction of upto 15% for in-house

research and R & D activities.

Key players of Automobile sector

Commercial vehicles TATA Motors, Ashok Leyland, Swaraj Mazda, Mahindra & Mahindra ,Force motors, Eicher Motors

Passenger vehicle TATA Motors, Maruti Udyog, Honda Motors, Toyata, Skoda, Mahindra & Mahindra, GM, Ford, Hindustan Motors.

TATAs Financials
Particulars Net Sales % age growth Net profit %age growth B/S as on.. EPS (Rs.) Mar ' 08
35,413 10.4 2,127 3.4 32,067 35.8 2,127 21.5

Rs in mn
Mar ' 07
206022 18.27% 15288.8 23.6%

Mar ' 06

261182.60
52.63

191640.50
49.65

163220.50
39.94

CFPS (Rs.)
Book Value (Rs.)
DPS (Rs.)

69.55
202.54
15.00

64.87
177.33
15.00

53.54
143.58
13.01

TATAs SHAREHOLDING
Indian Promoters : 33.7% Foreign collaborators : 0.0% Indian inst/Mutual Fund : 14.2% FIIs/GDR : 32.8% Free float : 19.3% Shareholders : 221,403 Listed on BSE: 500570 (scrip no.) NSE: TATA Motors NYSE: TTM

Projects 2008 & onwards

Compressed Air Car Tata Nano Low cost low carbon vehicle Land rover & Jaguar Electric vehicles

Some facts of performance

The company has incurred a capex of Rs 30bn till date and expects to spend another Rs 5-7bn in Q4FY08E.

Tata Motors Ltds net sales grew by 4.2% y-o-y while its net profit fell by 2.8% y-o-y. Tata Nano was expected to be on the roads sometime in October,2008, but it is not.

Contnd..
Expected CV (Trucks) volume growth forecast by 13% for FY08-10E. Expect large orders even from company like DTC (Delhi Transport Corporation), which is ordering 8,000 buses ($1bn order) in anticipation of the 2010 Commonwealth Games. Planning to acquire Foreign Brands

Expected Growth Rate g

On the basis of Global, domestic & companies past growth and projected cash flows, we estimate that g will be 6.55 in year 09, 10.2% in year 10 & constant thereafter.
Y/E March (Rs cr) FY2007 Net Sales % chg Net Profit % chg EPS (Rs) 32,067 35.8 2,127 21.5 38.3 FY2008 35,413 10.4 2,053 3.4 40.0 FY2009E 38,366 8.3 1,921 6.5 34.3 FY2010E 42,202 10.0 2,116 10.2 44.9

Calculation of k
Re= Rf+b(Rm-Rf) Rf=6% Rm=18-20% (or average 19%) B=0.8

So, Re=6+0.8(19-6) =16.4%

Future Cash flows

Particulars Cash flow per share Value at terminal year 2008 (FCFE) 69.55 (given) (V2) 2009 (FCFE)@6.55 74.11 2010 (FCFE)@10.2% 81.67 =81.67/(.164-0.066) =81.67/0.098 =833.37

Present value

=74.11/(1+0.066) =69.52

=833.37/(1+0.164)^2 =617.3 =69.52+617.3 =686.82

Intrinsic value

Conclusion
Current market price Rs. 500.15(NSE) & 500(BSE) Intrinsic value Rs. 686.82 Undervalued. Buy Tatas share, because it is underperforming due to its declining profit & sales figures in the last few years (because of heavy capital expenditure in some projects and foreign acquisitions, its cash outflow was much more than inflows).

Thank You