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Tata Motors rallied 782% the past 5 years. Is the stock still worth buying?
Summary
The Tata Motors stock has vastly outpaced the broader market. The company's transition to electric vehicles and its recent demerger plans are positive catalysts. However, despite strong earnings growth and a relatively low valuation compared to peers, concerns remain.
The Indian equity markets have performed exceedingly well in the previous five years, more than doubling investor returns. While the Nifty 50 index has gained nearly 120% since August 2019, several stocks in the index have delivered outsized gains to shareholders.
One such large-cap stock in the automobile sector is Tata Motors Ltd, which has returned a market-thumping 782% over this period, creating significant shareholder wealth. The outperformance has continued in 2024 as well, with Tata Motors’ share price rising 36%, compared to the Nifty 50 index’s gain of 11.9%.
If you had invested ₹50,000 in Tata Motors stock in August 2019 it would be worth roughly ₹440,000 today.
Valued at a market cap of ₹3,82,500 crore, Tata Motors is among the largest automobile companies in India. But as past returns don’t matter much for current and potential investors, let’s analyse if the automobile giant can continue its impressive rally.
Driving in sixth gear
Tata Motors has undergone a significant transition in recent years. The company traditionally manufactures and sells passenger cars, commercial vehicles, pickups, buses, vans, and trucks. In recent years, it has expanded to include electric vehicles, and is among India’s largest manufacturers of EVs.
Generally, a company’s share price performance is tied to its revenue and earnings growth.
Tata Motors’ sales increased from ₹2,64,041 crore in fiscal year 2020 to ₹4,43,878 crore in FY 2024, indicating a compounded annual growth rate of almost 11%.
While it reported a net loss of ₹10,975 crore in 2020, its net income stood at ₹31,807 crore in 2024. In the latest June quarter, Tata Motors’ net income increased 72% year-on-year to ₹5,692 crore. Revenue rose 6% to ₹1,09,623 crore.
The company’s Ebitda in the first quarter rose 19% to ₹15,785 crore, while its margin expanded by 170 basis points to 14.6%.
Sales from its Jaguar Land Rover divisiongrew 5.4% to £7.3 billion, while its Ebit margin improved by 30 basis points to 8.9%.
Divide to conquer
Tata Motors stated that its board of directors had approved the demerger of the company into two listed separate entities. It will soon split its passenger vehicle and commercial vehicle businesses.
Tata Motors expects the demerger to allow each business to better capitalise on growth opportunities, resulting in enhanced focus and agility. The automobile leader believes that the growth trajectories and market dynamics are quite different for the commercial vehicle and passenger vehicle segments, which requires separate management approaches.
This makes sense, and if it works out well, it could trigger the next phase of growth for the company.
The demerger might also result in synergies between the passenger vehicle and electric vehicle segments, allowing the business to command a premium multiple compared to the commercial vehicle business.
The big EV bet
Similar to other legacy automobile manufacturers, Tata Motors is targeting the rapidly expanding electric vehicle segment. According to a report fromFortune Business Insights, India’s electric vehicle market is forecast to expand from $8 billion in 2023 to $23.38 billion in 2024 and $118 billion in 2032.
Currently, EVs account for 12% of Tata Motors’ sales, and the company is investing heavily to gain traction in an expanding addressable market. But according to the government’s Vahan database, Tata Motors ended July with a domestic EV market share of 63%, down from last year’s 70%.
Tata Motors is confident about its long-term prospects in the EV segment even as it wrestles with sluggish sales and declining market share, albeit on a large base, amid a challenging macro environment. In fact, it emphasised it could end FY 2025 with 100,000 EV sales.
Tata Motors started manufacturing electric vehicles five years ago and soon had to grapple with multiple barriers. For example, the poor range of EVs made them impractical, as the charging infrastructure was non-existent. Today, the EV industry is part of the larger passenger vehicle trend, as battery-powered vehicles are gaining popularity among consumers.
All eyes on Tata Curvv
Earlier this month, Tata Motors launched its first mid-sized electric sports utility vehicle (SUV)–the Curvv EV–at a starting price of ₹17.49 lakh. The Curvv is Tata Motors’ fifth electric car and may be a key revenue driver for the company.
Soon after the launch of the car, brokerage houses Nomura and Jeffries issued a “Buy" rating on the Tata Motors stock. Nomura has a share price target of ₹1,303, and Jeffries has ₹1,330.
Tata Motors ended Monday’s trading on BSE at ₹1,076.10 per share, up 0.81% from Friday’s close.
According to Nomura, Tata Curvv should overcome barriers associated with the adoption of EVs as it achieves price parity with traditional internal combustion engine (ICE) vehicles.
But Morgan Stanley remains concerned over the recent slowdown in EV sales. The investment bank has an “Equal-weight" rating on the Tata Motors stock, with a target price of ₹1,178 per share.
The Tata Curvv promises a 150-km range on 15 minutes of charging. On a full charge, its driving range is pegged at 502-585 km.
Tata Curvv also has a non-EV lineup, which will help it compete with Hyundai Creta, Kia Seltos, and the Maruti Suzuki Grand Vitara, all of which are part of the fast-growing mid-SUV market. Mahindra & Mahindra, another domestic auto heavy weight, will be entering this segment shortly.
The mid-sized SUV segment accounted for a third of overall SUV sales last year, with volumes of about 680,000 units. Tata Motors is banking on the Curvv’s aggressive pricing and features to help it replicate the success it achieved with cars such as Punch and Nexon.
A compelling valuation
Given the company’s strong earnings growth, the Tata Motors stock trades at a trailing price-to-earnings multiple of 10.25x. The multiple for Maruti Suzuki is much higher at 26x.
Based purely on this one parameter, the Tata Motors stock, if you go by brokerage reports, is cheap, given its rising profit margins and steady revenue growth.
The automobile sector is quite capital-intensive and Tata Motors will continue to invest heavily to expand its EV manufacturing capabilities. Its rising capital expenditures and marketing spending could impact cash flows before it benefits from economies of scale.
Finally, a large chunk of Tata Motors’ business comes from global markets (Jaguar Land Rover). While that could be a source of strength for the company over the long term in terms of growth opportunities and technology, in the near term, an anticipated sharp global slowdown could have a significant impact on the company’s performance.
That said, if Tata Motors gets its strategy right, a widening earnings base should help it reduce debt and strengthen its balance sheet.
Earlier this month, credit rating agency Moody’s upgraded its rating for Tata Motors from Ba3 to Ba1 due to the company’s creditor-friendly policies, strong governance practices, and impressive track record.
Moody’s explained that the two-notch rating upgrade could be tied to the company’s revenue growth, improving margins and falling debt. Over the years, Tata Motors has used its free cash flow prudently while investing heavily in capital expenditure.
The takeaway
Tata Motors is a blue-chip automotive stock that trades at a potentially compelling valuation. Strong demand across segments and a refreshed product slate allow Tata Motors to compete across price points and geographies.
Further, its focus on expanding manufacturing capacity and lowering costs has assisted margin recoveries, eventually resulting in strong share price performances.
If these trends persist, and the company is able to deal with the headwinds of competition and changes in technology, Tata Motors could continue to cruise ahead in the long term.
Note: The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your adviser. This article is strictly for educational purposes.
Aditya Raghunath has over 15 years of wide experience in the field of finance and financial writing. His interest extends to global stocks as well. He has studied commerce at Mumbai University, and a management course with specialisation in finance and from T A Pai Management Institute.
Disclosure: The writer or his dependents may or may not hold the stocks discussed here.
