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17 March 2022

Tata Motors - Driving the Market

Tata Motors has rewarded investors handsomely over the past 12 months. The US-listed American Depository Receipt (ADR) of the Indian automotive giant has returned gains of 110% since January 2021 driven by an impressive change in fortunes as the company clawed back its share of India’s personal vehicle (PV) market. ADR has mobilised faster than competitors to gain an early advantage within India’s electric vehicle (EV) market.
 
The Tata Group conglomerate has long been a poster child of Indian business with the overall group valued at over US$300bn, however, its motoring division has had mixed fortunes in recent times. A series of popular first-generation releases throughout the 1990s and 2000s led Tata Motors to control just shy of 14% of India’s PV market in 2010, but a string of disappointing second-generation releases left the door open for foreign competitors to enter and capitalise, such as Toyota. In 2016, Tata’s share of the PV market fell to as low as 4.6% with many writing the carmaker off as nothing more than a fleet taxi operator. The inadequacy of the group’s product portfolio combined with increasing cost pressure and waning quality left them in dire need of a turnaround.
 
In 2016, the group hired ex Airbus Chief Operating Officer Guenter Butschek who set out to take the group on its “transformative journey”. The turnaround focused on improving operational performance via multiple avenues, but there was a particular emphasis placed on greater utilisation of the Jaguar Land Rover (JLR) subsidiary that the group acquired in 2008. A specific area of focus was a renewed approach to vehicle platforms; the design architectures of vehicles that include the underfloor, engine compartment and frame of the vehicle. Previously, Tata created individual platforms for each vehicle model, a cost and research-intensive process. The new strategy, instead, focused on identifying existing platforms that could be leveraged across a series of models to streamline both manufacturing and development processes. Tata identified JLR’s highly successful Discovery model to create the Tata Omega platform that would form the basis of Tata’s SUV offering in the Indian market. This decision was a renowned success as the group’s SUV offering has proved to be a hit within the PV market.
 
This, amongst other improvements, has reversed the group’s fortunes. For the first half of financial year 2022, on a standalone basis, the Indian division achieved revenue growth of 145.6% with market share increasing rapidly to breach the 10% mark once again. The turnaround strategy has been a success, as investors assess whether Tata Motor can to continue to deliver strong growth in a fiercely competitive landscape.
 
The electrification of vehicles remains the hottest topic within the automotive sector and Tata has wasted no time in staking its claim within the Indian market. At present, the group controls 75% of India’s EV market following a recent US$1bn investment from private equity group TPG Rise Climate which valued the group’s total EV subsidiary at US$9bn. It is a market, however, very much in its infancy given that current EV sales account for just 5% of total PV sales, with many incumbents, as well as international players such as Tesla, yet to enter. Nevertheless, Tata has gained a first-mover advantage that could prove significant and have the potential competitive edge of being able to leverage existing capabilities and investments of the wider parent company.
 
As part of a conglomerate, Tata Motors can utilise synergies across the group to control all stages of the value chain from battery components and charging stations to technological hardware and software required for EV’s. As 2021 proved, security of supply chains is of paramount importance and there is already evidence to suggest this is an area Tata may thrive where competitors are left vulnerable. The motoring division has already commissioned a partnership with Tata Power to provide end-to-end charging facilities at home, work and in public places as well as a partnership with Tata Chemicals to build a component supplier ecosystem for lithium-ion battery cells. Investors can also hold confidence in the business’s early portfolio of EV offerings, that now deliver ranges of over 300km and have proved to be an early hit with the Indian consumer.
 
Tata Motors has committed to investing an additional US$2bn into the EV subsidiary over the next five years to continue its development, no real surprise given the potential of the market opportunity. Today, the Indian PV market generates sales of 3.5m units a year and is forecasted to grow to close to 7 million by 2030. Due to India’s commitments to the Paris Climate Agreement, the government has put in place the Faster Adoption and Manufacturing of Electric vehicles (FAME) policy which offers upfront incentives to encourage faster adoption of electric and hybrid vehicles. Due to this, we can anticipate a significant increase in EV penetration alongside growth in the PV market, which in turn, will provide an attractive avenue for future growth provided Tata can maintain its dominant position.
 
In addition, the business remains well-positioned to capture growth within the Internal Combustion Engine (ICE) market and has hinted that it expects to develop hydrogen fuel cells to power its longer-range commercial vehicle offering. While intuitive, this future pathway to growth is not without risk. First, the group will have to succeed in areas it previously failed in by innovating within a competitive landscape to ensure its offering continues to meet the current needs of the Indian consumer while simultaneously developing technologies to ensure demand in the future. Alongside this, incumbents such as Maruti Suzuki and international players such as Tesla are yet to truly enter India’s EV market and are thus clear threats to Tata’s current dominance. Nonetheless, the early signs appear promising and it would appear management have learnt from failures in the past.
 
This article was taken from the Winter 2022 issue of 1875. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.
 
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. The value of investments and any income derived from them may go down as well as up and you could get back less than you invested.
 
Tata Motors - Driving the Market
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