“$2,000 Automobile Taking Asia by Storm!”

Today’s ad for our review comes in from Bryan Tycango, who writes the Asian Growth Stocks newsletter — we’ve looked at a few of his ideas before, but it’s been a while.

This time, the ad is for a company that’s going to “jerk the rug out from under today’s tottering
automobile giants.”

Which just seems kind of mean, really — haven’t they suffered enough?

This company is teased as the next Ford, from back in the days when Ford was a spectacular long term investment and a revolutionary company.

“This $2,000 car is going to revolutionize the automotive industry like Henry Ford did a century ago. His Model T knocked the price of a car down 90% to a price ordinary workers could afford.

“Ford Motors grew explosively and made early investors incredibly wealthy. This company is doing the same thing today in Asia, in a market 45 times larger.”

And if that’s true, perhaps you could own these shares for a few decades before the company collapses, as our own iconic automakers are doing here in the US.

So what’s the story about this new car?

“… to most of Asia’s 4 billion people, owning a car is still a distant dream. That’s about to change.

“There’s an Asian company that’s about to start mass producing a $2,000 automobile. This is not a tin can on wheels. It’s a real car made with steel, not plastic. It has a design as memorable as the Volkswagon Beetle, and incorporates innovations so revolutionary they’re protected by multiple patents, including 34 on the transmission alone.

“Like the Beetle, it has a rear-mounted engine. But the engine is fuel-injected and gets 53 miles per gallon, while meeting the toughest environmental standards with ease.

“It’s also roomier than the Beetle. It seats 5 people comfortably, and they can get in and out through 4 doors instead of two. Aircon is standard equipment.

“This car is going to sell like hotcakes. There are 240 million Asians already riding motorcycles. I can tell you they put entire families on them, with a kid on the front, the wife on back, and another kid in between. This $2,000 car is the perfect step-up for them. It’s cheap, convenient, economical, and it’s infinitely safer than piling 4 people on a motorcycle.”

So … it’s cheap, it is poised to be the leader in a massive new market … what could go wrong?

First, lets share the name of this company. This is …

Tata Motors (TTM)

And the car they’re teasing us about here is the Tata Nano — the Nano has also been referred to as the “one lakh” car, since it was designed to be the first vehicle to break the one lakh cost barrier (one lakh is 100,000 rupees). When this company has been teased before by other companies, the car was $2,500, but now, with the collapse of the Rupee, it’s down to just under $2,000.

So yes, it is an Indian car, and an Indian company. And I’ve seen this one referred to as the “next Model T” so many times that it seems we’re supposed to accept it as gospel. The Nano is by far the cheapest car to be mass produced, asssuming that they do really manage to launch production this month and have it in showrooms in April, as planned, but it comes with a passel of challenges.

The first challenge is that Tata Motors, part of the huge conglomerate Tata Group, is leveraged up to the eyeballs and is essentially betting the company on the Nano, it appears. This is one of India’s largest car makers and their largest truck maker, and their business until now has been quite profitable and focused mostly on smallish commercial vehicles … but over the past year or so they’ve bought Ford’s failing British brands Land Rover and Jaguar, and the launch of the Nano has been significantly delayed due to problems that are probably all too familiar for investors in India (they had a plant just about built last year, but then a local political fight forced them to move across the country and built a whole new factory).

The Nano is still enjoying accolades — it has won many design and innovation prizes, and it is indeed a distinctive looking little car, with some clever engineering to cut down on price and maximize space and efficiency. It also will try to take advantage of local entrepreneurs in distribution, since the car is designed to be shipped in pieces and assembled regionally or at dealerships. But it’s quite early yet — and it’s very hard to guess at whether the car, successful or no, will be profitable. The big dreams that Tycango and other touters have for Tata Motors count on the Nano being cheap enough to get Indian families off of their scooters and into cars for the first time, and also, to some extent, on the Nano sweeping into other BRIC countries to seed a new low end car market.

I, of course, have no idea whether or not this will happen. There was a good article about them in the Financial Times last week that nicely lays out the challenges: The Nano is coming, and soon, but Tata is dealing with crashing sales and a big debt load otherwise, so it seems like the Nano had better be the hit that they expect.

One can certainly argue that the crash of the world economy will help the Nano, since it may take share away from the other inexpensive cars that cost up to two or three times as much … but you can also argue that car sales are going to suffer so much that we can’t count on a whole new wave of car buyers in India or elsewhere, even with a much cheaper car. I don’t know which argument will be right, or if, as usual, we’ll be toeing the line between the two for the next year or two … if you’ve got a thought to share, please do so.

Tata Motors, by the way, has been very actively teased in the past as a pick of both Chris Mayer and Christian DeHaemer, picks which also focused on the Nano and on an investment in Tata Motors being something like a “back door” into the Tata Group (that’s a bit of a stretch). The shares have certainly not performed nicely for either of those newsletter editors who teased us about TTM when the shares were above $15 a year or more ago (they’re around $3.30 now) … but perhaps Tycango is getting in closer to the bottom, we’ll see.

And if you’ve ever subscribed to Asian Growth Stocks, please click here to review the newsletter and let us know what you thought — he claims a good record, but then, so do they all.

             ——————–
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1. Sales of cars are doing well in India. Part of why GM and Ford are alive are due to good sales in the asian markets. The Nano is a supplement to bring the 4 person family into a more shielded cube with 4 wheels. India is very big on 2 wheelers and prices for them range between $1000 -$1500 dollars. I have seen a family of 4 (with young kids) wing it on 2 wheelers on some of the unsafest roads in india, so for safety sake and a more comfortable ride, the Nano seems to be positioned well in that market.

   [Reply]

   Posted by jaidev ojha | March 3, 2009, 11:46 am

2. Chris Mayer, ed. of Capital & Crisis has, (or had) TTM at $17.72 about a year ago, it was on Lincoln’s Birthday as I remember.

   Now you can’t find any of the India stocks listed on his hard copy, only if you go online & SEO!

   I don’t get Mayer, he had such a great reputation & now, YIKES!

   This is one ugly looking chart:

   http://finance.yahoo.com/q/ta?s=TTM&t=1y&l=on&z=m&q=l&p=m50,m200&a=m26-12-9&c=

   Yet they pay a dividend & have positive earnings, GO FIGURE!

   [Reply]

   

   ponce Reply:
   March 9th, 2009 at 10:42 am

   It is no fault of Chris Mayer, other newsletter writers or Warren Buffett for the economy and thus the market to go CRASH. Look what happened to GM, Ford and Toyota, or GE and other blue chips. Some lost 90% of their value. Like them TTM is a victim of the market. Mayer is a value long term investor. At the time he touted TTM there certainly was value in it. Lesson I learned is, NO MATTER HOW GOOD IS A COMPANY I SHOULD PLACE A stop loss ON SHARES TO PROTECT AGAINST A MARKET CRASH.

   [Reply]

   Posted by SageNot | March 3, 2009, 12:14 pm

3. This is another example of problems the major automakers will face going forward. As electric vehicles become more efficient many more manufactures will emerge. With no need to build complex transmissions and motors car assembly will be greatly simplified inviting a whole new crop of entreprenuers.

   [Reply]

   

   ponce Reply:
   March 9th, 2009 at 10:55 am

   Electric vehicle will stay as a pipe dream until cheap high density battery becomes available. GM had a beautiful one but failed because of high cost. Yes we can say other parts of EV are perfected but the main issue is affordable high density energy battery.

   [Reply]

   Posted by Pete Ewing | March 3, 2009, 4:07 pm

4. So this might finally be a make it or break it situation for TTM? Would the Indian government step in to help out TTM like our loved/hated US involvement in GM. I see this as a great opportunity for a LEAP Straddle.

   [Reply]

   Posted by Mike | March 3, 2009, 7:58 pm

5. I was in India last year and saw those families of four and even five on a motorcycle. In the booming IT capital of Hyderabad, I saw huge strands of rebar being carted around via motorbike and bicycle. Without a doubt, there is an enormous low-income population in this market (and others in Asia).

   What I have a hard time visualizing is where these cars can fit on the already absolutely crammed roads. Yes, they are nano, but they will still take up more room than a bike, right? And there just is no more room, or there surely won’t be if millions of new tiny cars join the fray. Without some investments in the roads and infrastructure, how will this work? Buying a car to sit in a traffic jam is less appealing than cruising your Model T down Main Street.

   In any case, all these smaller, simpler, electric, cheaper innovations… it is about time, I say! I also say, ride a bike if you can! Walk, take a bus.

   [Reply]

   Posted by Julia | March 4, 2009, 10:55 am

6. TTM has a great history.In 2005 it hit a high of 20. Since the new car was unveiled–2000.00 the price has drifted down to $4. today. The ill advised purchases of Land rover and Jaguar have hurt. They are antithetical to the concept of cars for the moderatly affluent. The Tata empire can easily finance the motor division and I feel that the nano is Mr. Tatas baby and he will produce it en mass.They paid about 175 in 07 and o8. Small but encouraging. A long term value at this price. Herach.

   [Reply]

   Posted by Henry Chakoian | March 5, 2009, 10:07 am

7. Great article on Tata and the Nano in today’s Financial Times, just FYI (production much lower than expected, “Nano fails to hide Tata troubles”:

   http://www.ft.com/cms/s/0/871fd8d4-14ee-11de-8cd1-0000779fd2ac.html?nclick_check=1

   [Reply]

   Posted by StockGumshoe | March 20, 2009, 11:54 am

8. I’ve just read a downgrade to Hold from Deutsche Bank on Tata Motors.

   They say:
   We believe Tata Motors’ 6-month 76% outperformance vs Sensex discounts the improving outlook for the economy and commercial vehicles (c75% of its standalone EBIT).

   Domestic demand likely bottomed out, but JLR is a known unknown
   Medium and heavy commercial vehicle (MHCV) volumes reflect a nascent
   recovery. In addition, Tata Motors has steadily gained market share, especially in
   the truck segment (66.4% in FY09 vs. 64% in FY08). JLR’s volumes (YTD Apr) in
   the key US and Europe markets are down c19% and 40%, respectively, and its
   financials remain inscrutable at this juncture.
   Trading at EV/EBITDA of 6.5x FY10E
   Our price target is based on FY10E EV/EBITDA of 7.5x for Tata Motors (ex-JLR)
   and 4.5x for JLR. A 7.5x multiple for the domestic business is above the historical average, while the JLR multiple is in line with European peers and translates into
   zero equity value for JLR. A key upside risk is better-than-expected financials for Jaguar/Land Rover; downside risk is a prolonged downturn in CV demand.

   –
   It is clear that JLR is more important than the Nano. So if you think Jaguar sales will boom again….’
   They see Small Cars (Nano) accounting for 20% of sles in FY11. Not bad, but hardly shocking

   DB thinks recovery of JLR is unlikely before FY11
   Also DB claims that ‘elevated levels of leverage necessitate equity issuance
   —

   Investment thesis

   Outlook
   The outlook for Tata Motor’s domestic business has improved along with the economic outlook for the country. There are signs of a nascent recovery in commercial vehicles, which accounts for c75% of Tata Motors’ India-based business. However, we believe that recovery in Jaguar Land Rover is unlikely to happen before FY11E. Tata Motors’ strong stock outperformance and current valuations likely discount the positives of the India-based
   business and factor in an optimistic scenario for Jaguar Land Rover (JLR). Thus, we
   downgrade to Hold.

   Valuation
   We use EV/EBITDA to value Tata Motors. The company is in the midst of a transformation
   that is changing its revenues, margins and cash flow profile. There has also been a significant
   increase in the company’s leverage. Additionally, we are hamstrung by the lack of complete
   operating information on JLR. As a result, we use EV/EBITDA as our relative valuation metric.
   We partition Tata Motors’ financials into an Indian-based business and a global luxury car
   business (Jaguar Land Rover). The comparable peers for the global business include
   European manufacturers such as BMW and Daimler. We base our target price of
   Rs335/share on 7.5x EV/EBITDA for the India-based business and 4.5x FY10E EV/EBITDA for JLR. Our valuation for the India-based business is higher than Tata Motor’s historical average
   to reflect the recovery in commercial vehicles. Our valuation for JLR is in line with its
   European peers. This translates into 6.2x FY10E EV/EBITDA on a consolidated basis. Our valuations imply a minimal equity value for JLR.

   Risks
   Upside risks include better-than-forecast financials of Jaguar Land Rover and a higher-thanexpected
   fall in raw material costs. Downside risks include a delay in the turnaround of Jaguar Land Rover and a prolonged downturn in CV demand.

   [Reply]

   Posted by Bely | June 14, 2009, 11:53 am