Tata Motors is one of the good quality stock that as per our view is trading at steep discount today.

Let’s have a glance to its results:

Q2- 2015 % 1st H – 2015 %
Net Sales 60,164 100% 124,315 100%
Total Expenses 54,211 90% 110,731 89%
Profits from Operations 6,353 11% 14,516 12%
Finance Cost 927 2% 1,869 2%
Profit before tax 5,671 9% 13,199 11%
Taxes 2,364 4% 4,479 4%
Net Profit 3,307 5% 8,720 7%


If we look at the DuPont analysis then their return on Equity will be:

ROE= Net Profits/Total Sales* Total Sales/ Total Assets * Total Assets/ Total Equity

= 8720/124315 * 124315/231038 * 231038/67831

= 0.07 * 0.54*(2) * 3.41

=0.26 or 26%

Looking at the valuations, on the consensus earnings estimate, the intrinsic value band for the year end 2015 comes in the range of Rs 692 – Rs 822. It is today trading at 24% discount to its estimated fair value band.

So what is the risk that market participants are factoring within this stock today? The last quarter by itself was a bit soft compare to first quarter in sales as well as in profits. It looks they are more worried about sales softening ahead and also profit margins to fall down

Talking with other investors with other opinion then us, they are expecting their profit margins to go down by 1%, flat sales compare to last year and they are also expecting investors will have to put more funds into this business. In short they are expecting a return of 21% on its equity for the year 2015.

We are of different opinion and we stick to 25% – 27% range of return on equity. Overall, the revenues have ticked up by almost 25%, profits before taxes have doubled even though business within India reported losses. Jaguar XE and Discovery Sport will go on sale from next year in January and there are couple of new launches and facelift (Safari Storme, Tata Bolt) in India on top with inflation and oil prices falling down and overall Indian GDP starting to uptick, will work in favour of Tata Motors.

The only risk at the moment we feel is the Indian business. Any big operating losses from India can impact badly to its profitability. We do own this business in our portfolio and have interest within it.

Happy Investing!!