“The Industrial Pioneer of India … an unprecedented opportunity for growth.”

by Travis Johnson, Stock Gumshoe | March 25, 2013 12:44 pm

Sniffing out a teaser for Benjamin Shepherd's Global Investment Strategist

Global Investment Strategist[1] is the newsletter that was called Silk Road Investor[2] back when it was launched with Yiannis Mostrous at the helm six or seven years ago — it was given the less evocative new name once the market crash and the huge wave of Chinese frauds made investors worry about the new “silk road” … and now, with the departure of Yiannis Mostrous, it has a new “chief strategist” at the helm in Benjamin Shepherd[3], who previously ran the ETF-focused offering at Investing Daily[4].

But it appears that they’ve kept the storytellers on the copywriting staff at Investing Daily, and the new Global Investment Strategist ads tread the same path as the old ones — promising riches from emerging markets.

We haven’t covered one of their ideas in quite some time but under Mostrous they did tease a few interesting ones, ranging from Jollibee[5] in the Philippines to Keppel Corp in Singapore[6], with only their Russian teased picks being real disasters, so let’s take a look and see what tale Shepherd has to tell us (for $497 a year).

Here’s the intro that pretty much sets the stage for us today:

“From the forests of India[7] comes a new economy car that the world’s billions can afford… And now this innovative company in India has just acquired two of the world’s most sought-after brands in luxury cars…

“Economy Meets Luxury: The Two New Cars That Will Drive the World

“The facts don’t lie: There are 7 billion people in this world, and 3 billion of them live in areas that are developing rapidly. That’s 3 billion people who anxiously want to buy their very first car, but most of the world’s vehicles are way, way out of reach. Until now.

“This car company in India has put rigorous cost controls on every single detail of their new economy car—from the thrifty single side mirror to the sparing (but effective) three lug nuts per wheel—and have created a ~$2,995 car that’s now in reach for this giant, upwardly-mobile segment of the world.

“Simultaneously, this company has used their boardroom prowess to purchase two premium brands of luxury cars that are well-established and well-respected in the U.S., Canada[8] and Europe.

“Early sales figures for both the economy and luxury ventures give promise to an unprecedented opportunity for growth.”

He likens this story to the early days at Ford, when they reinvented manufacturing and transportation by cutting costs, streamlining, and appealing to the masses with a low price …

“My stock pick even has their own version of Henry Ford himself: an unstoppable innovator who inspired his nation, reinvented manufacturing standards and reinvigorated the national workforce.”

And of course, he also tells us about his incredible stock-picking acumen, claiming that “his” GIS portfolio is up 118% over the last five years. Maybe he was involved in the newsletter during those years of gains, but as far as I can tell he wasn’t on the masthead until just a few months ago.

Some of you will already know the name of this car they’re teasing, and of the company that’s selling it — it was very big news several years ago — but don’t go spoiling the surprise for everyone else just yet, we’ve got a few more clues to parse:

“Selling to the world’s billions wasn’t a last-minute idea. My stock pick began development on the Economical Wonder in 2003, and didn’t release the first production model until 2008.

“But it’s only been in the last few months that the true production goals of this car have been realized. A hundred years have been building up to this moment.”

And a few more details for you …

“The release of the Economical Wonder hasn’t been without a few bumps in the road. This company recently made a wide-scale voluntary replacement of a finicky starter on 140,000 of these cars. That number may sound large, but you have to remember that this is a car designed for a volume of millions and millions.

“In reality, the cost of the recall was only $20 million, and while it’s a tough blow to a tight-margin vehicle, it unequivocally proved to the world that this company isn’t like the rest, and that they stand behind their product.

“But there’s a point here that’s even more important: My stock pick is honing their product and learning lessons along the way, just as Ford did in the teens of the 20th century. My stock pick will emerge as the only company in the world who will know how to make the dream of the world’s cheapest car into an everyday reality.

“That’s a competitive advantage so extreme that it will reshape the world’s concept of ‘economy market.’ …

“… the Economical Wonder has finally achieved its first major production milestone: one million units a year.”

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We learn that they’re now securing capacity to increase that production by 150%, that they will expand outside of India …. but also that there’s another side to this company, they’re not just the maker of the next breakthrough tiny, cheap car, they’re also luxury automakers:

“The fact that my stock pick has now entered the luxury market is a testament to their multi-faceted long-term strategy.

“This puts my stock pick in America, in England, in Europe and in the rest of the world’s developed countries with two well-known brands.

“Brand #1 is known for their premium line of sedans, grand tourers and executive cars. Since their acquisition, my stock pick has poured significant sums of money into R&D for new models that reflect both the tradition of the brand as well as ground-breaking innovation. It’s a tough tightrope, but so far response has been largely positive. They successfully sold 250,000 units last year, worldwide.

“Brand #2 is known for their line of SUVs, which are classy, sporty and luxurious all at the same time. My stock pick has invested an equal amount into the R&D for this brand, but the effect of the updates is more subtle. It’s been a success: Their sales have jumped 38% since the acquisition, and this is largely due to the brand’s entrance an into untapped market. This includes a notable offensive in China[9], where my stock pick has opened over 100 new dealerships.

“China is a significant part of the luxury plan. China’s high-end automobile market is relatively new, and their tastes are different than those of L.A., New York or Paris. In short: China loves SUVs, so they love Brand #2.

“Nearly 20,000 units were sold in China alone, an 80% increase over previous attempts. The ink on these numbers is still drying, but early predictions suggest that Brand #2 will be a hit in China. That would mean a completely new luxury market for my stock pick, and one that isn’t yet ruled by any other brand.”

OK, so … who’s ready for guessing?

Yes, you’re right — this is Tata Motors (TTM)[10]. The tiny car that was launched with a $2,000 sticker price is the Tata Nano, Luxury “Brand #1” is Jaguar and “Brand #2” is Land Rover, both of which they bought from … Ford, just to come full circle. That was about five years ago, and they paid something like $2.5 billion for the brands at a time when Ford was desperately trying to stay alive without government support, refocus, and jettison their small luxury nameplates (as that process continued over recent years they also sold Volvo and discontinued Mercury).

At the time it seemed like a pretty bold move for Tata, perhaps even a nice postcolonial bit of revenge as they took control of the iconic British brands, but it does seem to have worked out pretty well so far in giving them a more diversified global business and some technology and design they may be able to import to India. Tata has been teased before a few times, as you can imagine — it was hard to resist the storytelling appeal of the Tata Nano when it was being developed and launched in 2008 and 2009, and thanks to some good timing it also makes the list of top teaser picks because it so happened that Bryan Tycango over at Asian Growth Stocks[11] teased it back in March of 2009, when the global financial crisis had brought pretty much all emerging market stocks down. And down hard. It got down to just a few dollars back then, bouncing back later that year, and has more recently spent a few years bumping up and down between $15 and $30 as news and sentiment tides have moved in and out.

And yes, most of the teasers back in 2008 and 2009 also used the same basic spiel, that Tata is the new Ford and the Nano is the new Model T, ready to revolutionize transportation in the world’s second most populous country.

Tata is a large company, with a market cap of around $15 billion, but it’s also a fairly small cog in the much larger Tata Group, which is one of India’s largest family-controlled conglomerates. There are apparently now 32 separate listed Tata companies, though just a handful of them make up the heart of the $100 billion group — the biggest is Tata Consulting, which is about a $50 billion engineering and communications outsourcing, software and business consulting firm, but they also have a large steel company, power company, telecoms, other industrial companies, etc.

But it is the automobile company that gets most peoples’ attention — they built this up as the first Indian car company of consequence over many years, and though the foundation of Tata Motors is really in commercial vehicles, building many of the trucks and buses that have kept India moving for decades, their focus in recent years has been on the Nano, an inexpensive modern car meant to help families upgrade from motorscooters, and on the Ace, a tiny urban truck for deliveries. They are the biggest Indian car company, but they’re not the biggest seller of passenger cars — that probably falls to Suzuki, which has the top selling cars, Hyundai, or Mahindra, Tata’s largest Indian competitor. The Tata Nano has breached the top ten in car sales in India but isn’t even Tata’s largest seller yet.

India has been in an economic funk for a while, and Indian auto sales in particular have been declining for several months in a row (and will have their first down year in more than a decade), so that’s part of the reason why what should be one of the more exciting growth stories in one of the more exciting growth markets is currently trading with a PE ratio of about six or seven. Several pundits are now starting to stick their necks out and say that India is “cheap enough to buy,”[12] though I can’t say that I’ve looked at any Indian stocks in quite a while. There’s been a lot of news out of India this month, as the new budget failed to excite much interest among investors who were looking for some more dramatic reform — or even some specific stimulus measures to help specific industries like autos.

The country is obviously still compelling for long-term investors, if for no other reason than that India is the second largest country in the world (and may become the largest in 10-15 years at current growth rates), it has grown faster than almost any other economy outside of China over the last five years (until the recent lull), with rapid growth expected eventually to resume, and it is also one of the only really large countries whose demographics are set up well for the next couple decades — they are younger, with more young families and young workers. China and Japan[13] are going to have worker shortages and high dependency ratios before too long (well, Japan is already there — the US will be there soon, too, if we don’t increase immigration), as low birth rates manifest themselves in small numbers of workers to support each retiree, but India won’t have that problem in the foreseeable future — the average Indian is still well under 30 years of age, and that will remain true for the next decade. And the consumer marketers, including those who sell automobiles, are slathering at the huge population of new workers and emerging consumers — the population of new workers in India (those aged 18-25) is greater than the entire population of Brazil[14].

US car companies have been losing money in India for more than a decade now, and most of the other global majors have also failed to gain traction in this heavily bureaucratic, challenging, fragmented market, but those who can produce at genuinely low costs and appeal to young families and first time car buyers seem to be doing pretty well — just not this year. Car sales are down in recent months [15]thanks to high interest rates, high gas prices, and generally weak economic situation for young first-time car buyers. Tata has been trying to continually improve the dealership network and the service they provide, part of the appeal of the Nano has been that it’s easily assembled at local dealerships to a large degree, and has cheap and widely available parts, and they’ve also recently begun taking credit cards and doing other innovative financing in partnership with national banks — so they are trying to really rejuvenate this low end of the auto market, not necessarily just trying to take customers from the more expensive compact car makers like Suzuki but really to create a new car-buying and ownership experience and build a new market among people who wouldn’t otherwise own cars at all.

That’s pretty ambitious, and it seems to me like it’s probably a good thing that they have the steadier truck and commercial vehicle business to keep them going when the Nano and their other small vehicles hit rough patches (they have more than 60% of the commercial vehicle market in India, only about 10% of the passenger car market). And, of course, they have those iconic UK luxury brands as well — Land Rover and Jaguar aren’t likely to be Indian stories anytime soon, but they do have niche businesses in Europe and the US and they are hoping to participate more fully in the renaissance of Chinese luxury auto sales over the next decade … with a sense, it appears to me, that they have to push in pretty quickly and establish a strong brand in China, particularly for Land Rover, before others beat them to the top of the pyramid.

They are opening a new assembly plant for Jaguar in China soon, and they’ve been producing flat out for other markets even as Europe slumps, with Jaguar apparently having plenty of appeal in places like Turkey and Eastern Europe … but in terms of volume they’re still very small. Those luxury brands have been doing well in emerging markets like Brazil and China, too, generating much more growth than the local Indian market or Tata brand for Tata Motors in 2012, with nice earnings and margins for the Jaguar Land Rover division last quarter as the Indian motors division lost money. You can see the quarterly conference call transcript here [16]if you’re interested in the details.

So … will the Indian consumer economy and passenger car sales recover in the next year or two, and will Tata Motors improve their standing in that market? That’s the big question for building the Nano and the Tata Motors brand, though it may be that they can grow the luxury businesses overseas and continue to offset some of that weakness at home. I think investing in India is likely to return to favor at some point, and the economy is likely to grow, though there is always a big political/reform/infrastructure question when it comes to sustainable Indian growth and I have no idea whether that growth will return as soon as this year or next year. Tata is certainly a formidable company, with a strong focus on building businesses over the long term, so I wouldn’t bet again them turning the Nano into a big business — but they’re going to need a bit more of a spark from the Indian economy (or falling interest rates, or falling oil prices) to really get the motor running for that little car and for their domestic business. The stock is not particularly expensive, and they’re not overly burdened with debt, so it may be that Tata will be a decent performer as their markets recover or grow.

I’m not overwhelmingly excited about Tata Motors and I don’t think I’ve ever owned the stock, but often exciting stocks are overrated — it’s your money, so what do you think about the Nano, or about Jaguar Land Rover, or Indian investing in general? Let us know with a comment below.

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