Can Tata Motors shares go up four times in two years?

Tata Motors formerly Tata Engineering and Locomotive Company (TELCO) was for the most part since independence India’s premier blue-chip stock.

Along with Tata Steel, it was one of two main Tata group enterprises.

Tata Motors acquisition of Jaguar and Land Rover and thereafter

In 2008, Tata Motors acquired British automobile manufacturer Jaguar and Land Rover (JLR), a loss-making company from Ford, for $2.3 billion. This made Tata Motors a truly Indian multi-national from what was till then a largely India-focused company.

Tata’s management managed to turn around the performance of Jaguar and Land Rover and by the year 2012, the latter was making a net profit of £1.46 billion on sales of £13.5 billion, which is a very healthy net profit margin of over 10%.

However, by the financial year 2018/19, the fortunes of Jaguar and Land Rover as well as that of Tata Motors had nosedived.

Tata Motors had to provide about INR 28,000 crores as impairment loss towards the British firm’s goodwill in its books. An impairment loss is a non-cash loss which comes from depreciating or writing down the value of the assets of the company. This started a period of huge losses in Tata Motors books as this year was followed by the Covid years when the economies of the world were badly hit.

As a consequence of the poor operational performances, Tata Motors’ shares too took a heavy beating and saw a low of INR 65 on 30 March 2020. This is a fall from about INR 430 at the beginning of 2018.

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Rebounding of Tata Motors shares

However, people soon realized that Covid-19 was a temporary problem. Also, Tata Motors, especially, in its Indian operations in the past year, was beginning to do very well. One of the measures the company took was introducing newer and better models, which were very well received by the Indian public. Seeing all this, the price of the share of Tata Motors also sharply rebounded to INR 509 on 15 November 2021, which is up by 7.8 times from its lows that were registered less than two years ago.

How to know the true value of Tata Motors shares

A staggering nearly eight times return in less than two years for those who bought it at the March 30th low of 2020. Would you have bought Tata Motors shares at the low price of INR 65 price? What is the value of a stock? True value. How does one put a value on any stock? Again, what would you say if I told you that there is scope for Tata Motors to go up from its price of INR 432 on 25 March 2022 to maybe four times the current price? In two years. This brings us back to the question of what is value and how do we put a finger on it?

There are many ways of valuing a stock. Discounted CashFlow system and EPS*PE Multiple system come to my mind. Let’s use the EPS*PE Multiple procedure to put a value on a share. We should here be warned that this like the other methods of stock valuation is not a perfect science. The process at best gives us an approximation. It involves calculating the net profit per share of the company for a year called earnings per share (EPS) and multiplying it by the number of times one is willing to pay for buying a share in the future profits of the company. This number is the PE ratio or PE multiple.

Eg: If a share is quoting INR 100 and has an EPS of INR 10. Then the PE Ratio or Multiple is 10. –: INR 100 (Share Price)/EPS (INR 10). That is a person is willing to pay 10 times the EPS of the share to buy it.

Let us apply the EPS*PE Multiple method to arrive at the possible value of Tata Motors two years from now. Say April 2024. In April 2024, the Indian automobile company will be looking at 2024/25 forward results and would be discounting them. So, we would need to project the EPS for 24/25 and put a finger on what would be a reasonable PE Multiple it would command for 24/25 EPS in April 2024.

For projecting the EPS for 24/25, we need to project sales for the year and an expected net profit margin. I am not looking at any fresh equity issues.

The revenue of Tata Motors includes its subsidiary Jaguar and Land Rover’s revenues. It will also include sales from the UK, China, North America, rest of Europe, and the rest of the world apart from India.

India now constitutes about 25% of the global turnover of Tata Motors. I project India’s share to go up to about 30 % by April 2024. In 2020/21, Tata Motors had global revenues of about INR 2,50,000 crores. I expect the global total revenues to grow to about INR 4,00,000 crores by 24/25.

An annual 15% simple growth totaling 60% over the four years. I am expecting the growth to be more in India during this period, but substantial growth would also come from the global post Covid-19 economic recovery.

The future of Tata Motors shares price

Tata Motors, I would say is expected to have a 7% net profit margin in 24/25. This could give a net profit of INR 28,000 crores for 24/25 and an EPS of INR 73 with the equity remaining constant. The figures are based on a study of the net profit margins of global auto manufacturers such as BMW, Toyota, Mercedez-Benz, and Maruti Suzuki in India. It also takes into account Tata Motor’s own record in the past and also keeps the evolving situation where the input cost could come down for reasons such as the lowering of inflation and the chip shortage mitigating.

Let us now look at what PE ratio Tata Motors should command in April 2024 while looking ahead at the 2024/25 results. In April 2024, Tata Motors would be a company with 30% India operations and 70% global play. Most global passenger vehicles (PV) companies such as BMW, Toyota, or Suzuki Japan have a PE ratio of about 10, while Maruti Suzuki, an Indian company with India operations has a PE ratio of about 60. Looking at these and other growth-related factors, I am assuming Tata Motors will command a PE of 25. This gives the share a possible price of INR 1,825 in April 2024, which is over four times the current price in two years. Admitted, this is a rough and ready estimate. However, this is something I am willing to go with.

Is Tata Motors a good investment

The shares of Tata Motors have also caught the public fancy lately. Indian billionaire Rakesh Jhunjhunwala has about INR 2000 crores in value in this stock. He is even known to have added to his holding this past quarter.

The Tata group is known for its high ethical standards. This, lets us feel secure that the management is not only competent but also honest. Furthermore, being India’s premier business group, we can be ensured that Tata Motors is well funded to take on tough challenges. Also, the stock is making lot of investments in electric vehicles (EV) technology and making progress with those investments, which keeps it future assured.

Considering all this, I am willing to bet on Tata Motors being a good investment. However, like in every investment, there are risks which in this case, I believe are well worth taking keeping the prospective return in mind.