Stock alert! Tata Motors is the new multibagger on D-Street? Here's where the automaker is headed

Faith in Tata Motors share price is rising. It was last year, when investors were removing their money from Tata Motors so much that the shares even halved. Tata still continues to face headwinds due to its luxury car brand Jaguar Land Rover which is entangled in weak demand in China market and Brexit uncertainty, but now, tables have turned and improvement is being witnessed in both JLR and Tata Motors. Still, on Tuesday, this automaker's share ended at Rs 180.75 per piece down by 0.33% on Sensex. 

Guess what! Tata Motors is now seen as money making magnet, and in fact if bought now shares can nearly double the investment, say experts. 

The management has outlined its strategic objectives to (1) gain market share in both commercial and passenger vehicle segments, (2) improve profitability through cost-reduction efforts such as reduction in supplier base by 65% since FY2017 levels, reducing platforms in the commercial vehicle segment to 12 from 18, lower development costs and reducing warranty costs and (3) generate FCF in the standalone entity and thereby, reduce leverage. The company did not give any market share, revenue or EBIT margin guidance for the standalone entity.

Hitesh Goel, Nishit Jalan and Rishi Vora analysts at Kotak Institutional Equities said, "The management has reiterated its target of achieving profitable and cash-accretive growth with market share gains across both the segments in the India business. The company shared greater details on steps undertaken to
(1) gain market share through new product introductions, improve product quality and enhance customer engagement and (2) achieve cost-reduction targets, which were quite impressive. Post the analyst meet, we are more confident of a turnaround in the India business over the next few years. Reiterate BUY with an unchanged FV of Rs 270."

Here's how Tata Motors is seen to turn business around, as per Kotak's analysts. 

Commercial Vehicles: 

Tata Motors has undertaken a global scale teardown and benchmarking exercise, which includes tear down of 35 vehicles of Tata and peers to track costing of parts covering 60% of vehicle cost. Further, the company has been able to achieve 47% reduction in warranty costs over past two years through quality improvement program. The company is a targeting to achieve 2-3% reduction in material costs over the next few years. 

The focus is on offering higher mileage, payload, safety and comfort for the customers. The company has launched 50+ products with almost 200+ variants over the past three years (Ultra 1518, 3817, Ace Gold, Starbus hybrid, etc. are key launches). The company is well-prepared for launching ICE, hybrid and electric products in the CV space.

Passenger Vehicles: 

Success of the company’s recent new model launches and efforts undertaken to enhance customer experience has started paying off as per several surveys conducted by external agencies, as highlighted by the company.

Mayank Parekh, President of passenger vehicle business, highlighted that the company’s aim is to be in the consideration set of all customers across segments over the medium term. He believes that domestic passenger vehicle industry will revive in 2HFY20 and Tata Motors will gain market share in the PV segment, cited by Kotak. 

Focus on younger generation (already happening with recent products), undertaken experiential and digital marketing activities such as Hexa experience centers, Hexa Cafes, Influencer program for Hexa prior to product launch, etc.

Focus is on both expansion and quality. TTMT has increased presence to 716 cities (from 359 cities in FY2015) and target is to expand to 2,000 cities over the next few years (especially important for TTMT due to better brand image in rural markets which accounts for 35% of company’s volumes), dealer network has increased to 848 dealers currently; versus 359 cities in FY2015. Rural sales for the company grew by 20% yoy in FY2019.

PV segment EBITDA margin improved to 0.1% in FY2019 versus -11.4% in FY2018. Company has achieved >100% of their cost-reduction targets (26% cost savings in machines and spares, 13% savings in variable costs, 11% in productivity improvement and 21% in fixed cost savings.

Improving retail demand prediction tools and dealer mindset to reduce dealer inventory to 2 weeks by September 2019 from 6 weeks currently. 

R&D Capabilities:

The focus is on (1) improving performance of the vehicle – higher power, flatter torque, etc., (2) lower cost of ownership through higher fuel efficiency, lower service requirement, etc. and (3) higher refinement, durability and reliability of vehicle (longer vehicle life, higher warranty period, lower NVH levels, etc.).

The company has in-house capabilities to handle impending regulatory requirements such as stringent safety and emission norms and change in industry trends towards EVs, hybrids, autonomous vehicles, etc.