Why are investors worried about the Tata Motors stock…?

As the stock of Tata Motors fell below the 280 mark, it had already lost well over 50% in the last 6 months since April 2015. Interestingly, during this period, the Nifty has been down around 15%, but Tata Motors has been a gross underperformer compared to the Nifty. For a stock that had been the outstanding performer within the Tata group as well as within the auto pack, what has gone wrong so suddenly? In fact, quite a few things have gone wrong for Tata Motors…

China has been a major worry for Tata Motors…

It was said that among the major high cost acquisitions done by Indian companies in the 2007-09 period, Tata Motors’ JLR acquisition was like a feather in the cap. Tata Steel was struggling with Corus, Hindalco was struggling with Novelis and Bharti was having trouble with its Zain acquisition in Africa. In the midst of this melee, JLR saw a sharp upturn in sales from China and that had been largely instrumental in turning the fortunes of Tata Motors. Things changed sharply for Tata Motors when China began to slow down. GDP growth came down from over 10% to closer to 6%.

The Purchase Manager’s Index (PMI) fell sharply to 47, indicating a loss of growth momentum. Above all the Chinese equity markets crashed by close to 35% in a span of just 2 months resulting in substantial erosion of wealth within China. The result was a sharp contraction in sales of luxury cars. Not just JLR, but other luxury models like Audi, BMW and Mercedes Benz also took a hit in China. But for Tata Motors, which was heavily counting on JLR’s China magic, this was bad news. Worse still, this situation shows little sign of improving in the near future.

Lack of product differentiation has hit Tata Motors in India…

Over the last few years, Tata Motors never really depended on Indian markets. The JLR acquisition ensured that Tata Motors predominantly became a European manufacturer and was relying heavily on the insatiable appetite from China. Tata Motors had little by way of product differentiation to offer in India and that is, perhaps, where it lost the plot to other domestic manufacturers.  Look at a price comparison of Tata Motors versus Maruti. While Tata Motors has lost close to 55% value in the last 6 months, Maruti continues to make new highs in the market. So how did Maruti manage this?

Firstly, Maruti did a very fine product differentiation and ensured that there was something to offer to every class of car buyer. Its focus on the aspiration segments ensured that Maruti became the beneficiary of constant model upgrades and size upgrades. In a way, the company managed to grow along with the aspirations of the vast Indian middle class. Maruti also ensured that the market was constantly kept excited with a slew of new models, which Tata Motors could not manage to do. In fact, if you look at the monthly numbers of auto demand, the maximum incremental demand in India has been captured by companies like Maruti, Hyundai and Honda which have kept the vast Indian middle class excited with new launches and innovations.

 Volkswagen could be the real worry for Tata Motors…

The real worry for Tata Motors could be what happens as an outcome of the Volkswagen fiasco. VW recently admitted to fudging software to ensure that test results showed VW cars as low emission cars. The problems first started manifesting itself when the US authorities discovered that VW emissions, when tested on the road, were vastly higher than what they claimed under test conditions. This VW fiasco is critical for Tata Motors in a variety of ways.

Firstly, it raises some very pertinent questions about whether diesel engines are actually as eco-friendly as they are made out to be. This could have serious implications for Tata Motors, which predominantly relies on diesel technology to fire its automobiles. Secondly, the outcome could be that the US and other countries could prescribe much more stringent tests and compliance for diesel car manufacturers. This could substantially increase the compliance cost for auto companies the world over. Last but not the least, the VW case could hasten the shift out of diesel engines to more environment friendly technologies like electricity, bio-diesel, solar cars etc. This is not great news for a company like Tata Motors which has invested heavily on the future of diesel technology.

It could be challenging times for Tata Motors…

There could be major challenges for Tata Motors in the coming months. JLR is likely to be weak till the time China picks up. That looks some distance away. Domestically, even in the diesel MUV space, M&M has already taken a lead over Tata Motors. VW is the latest joker in the pack. It is hard to impute a value to the damage that it can cause. Suffice to say that if the US reacts aggressively, then it could have long term repercussions for the auto industry in general and Tata Motors in particular. That could be, probably, the biggest overhang as far as the stock of Tata Motors is concerned.

You can ask us your stock related questions with #AskReligareOnMarkets via our Twitter channel @religareonline

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