“India Rising: The Golden Quadrilateral and the new Model T”

by Travis Johnson, Stock Gumshoe | March 7, 2008 12:00 pm

This one comes in from Chris Mayer[1] for his Capital & Crisis newsletter. Chris has brought us, via teaser email, several investing ideas over the past year — from one of many “next Berkshire Hathaway” picks[2] (down about 15%) to an interesting under-the-radar natural gas[3] company (up 75% or so). But this one actually includes three teaser companies, and your Gumshoe is weary from a week in the salt mines, so I’ll take them one at a time.

And since it’s Friday, I’m going to do the easiest one first.

What Mayer is calling the “Golden Quadrilateral” is “a massive highway stretching 3,625 miles,” scheduled to be opened in about two years (given what I hear about Indian infrastructure construction, I wouldn’t hold your breath about that timeline … but it’s not particularly important for our purposes).

The tease is really for India’s Model T — the “one lakh” car developed by Girish Wagh.

If you read much in the financial press, or watch CNBC at all, you probably saw the unveiling of the 1 Lakh car — it’s the first affordable car for India that has a real chance of competing with the ubiquitous mopeds and motorcycles that many Indian families rely on for transportation.

And, in Mayer’s words, “it’s not just in India where this company will market the 1-lakh. Plans are in the late stages for marketing in both Africa[4] and South America… opening up affordable transportation to tens of millions more people.”

So, they’ll be pushing this one pretty much everywhere that there are a lot of people, any decent roads, and a lack of stringent safety regulations (it has seat belts, but definitely no air bags or antilock brakes). It bears some resenblance to the tiny Smart cars from Mercedes, but of course is much less expensive — it’s called the Nano, and it is slightly larger than the iPod of the same name. Unlike Henry Ford’s Model T, it will be offered in more than one color. There’s an overview article here about the Nano from the Geneva Auto Show[5] if you’re interested.

Oh, and for those of you who don’t yet recognize where we’re going … this car is made by

Tata Motors (TTM)[6]

And, perhaps surprisingly, the actual launch of the Nano isn’t doing all that much for the share price — it’s at about $16 at the moment, near the bottom of the $15-20 range it has mostly traded in during the past two years. The valuation looks quite reasonable, if Yahoo[7] Finance is to be believed, at a trailing PE under 12.

I would certainly buy Tata Motors before I bought the makers of the first Model T or any of the Big Three — Tata doesn’t have a stranglehold on the auto market in India, but it certainly has the home team advantage and it’s expected that this Nano will bring in a huge number of first time buyers. If they can get a good financing structure in place to let people buy on credit, they might even exceed those goals — even at $2,500 it’s pretty expensive for the average Indian family, and more highly paid Indians could easily buy one of the fancier inexpensive cars that are priced between $5,000-10,000.

So I don’t know if the 1 lakh car is going to revolutionize Indian transportation or if it will be the next Yugo … but Tata Motors, part of the massive Tata Group empire, certainly also has other products (it’s strongest markets are in commercial vehicles, trucks and buses in India) and it’s probably at least a decent way to play the building of an Indian intercity highway system and the rise of a lower middle class. The main risk that I see for this one — and probably the reason that it trades at a very reasonable valuation, especially for an Indian compani — is that they are essentially competing solely on price with essentially every single auto manufacturer in the world. It’s no secret to Honda, Toyota, GM or Ford that India will be a big car market eventually, and they’re all trying to get a piece, so it’s not as though there isn’t any competition. If the Nano sells like gangbusters, you can be certain that there will be other 1 lakh cars in the future.

It’s widely traded on the NYSE, and fairly widely known, so there will be plenty to read if you’re interested. And if you already own shares or have had a look, feel free to share your wisdom here. I’ll get to the other two Indian picks from Mayer shortly.

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