Novice investors like you and me are tutored to buy when there is “blood on the street”. However, when we do see the “blood” we go frigid with fear because we don’t know how much more blood will ooze out of the stock.
This time, there is blood gushing out of Tata Motors, the blue chip behemoth stock belonging to the venerable Tata group. The stock has lost nearly 50% of its value from the peak and is presently floundering at a 52-week low over concerns that the slowdown in China will affect sales of the Jaguar and Land Rover luxury car models.
To understand whether Tata Motors is a good buy, we have to first turn to the wisdom of Howard Marks, one of the greatest thinkers of investment theory. In his latest piece, Howard Marks has explained that a stock languishing at a 52-week low is actually a “risk-free” and a “safe” stock because all expectations have been drained out of it. If there are no expectations, there can be no disappointment and so there is no risk of much downside, Howard Marks says with his customary clarity of thinking.
Prof Sanjay Bakshi, the authority on value investing, offered similar advice when he urged us to bear in mind the difference between “risk aversion” and “loss aversion”. If there is no risk and the gain:loss ratio is favourable, we should dive into the stock, the Prof advised.
Now to understand the fundamentals of Tata Motors, we have to turn to the brilliant analysis by Shruti Aggarwal. In her latest piece in seekingalpha.com, Shruti points out that Tata Motors is likely to see robust growth in the foreseeable future owing to rate cuts by RBI, falling crude oil prices, falling aluminum prices (a major raw material) and launch of new cars and models.
Shruti also emphasizes that Tata Motor is in a strong position owing to its strong balance sheet and rich positive cash flows. Further, Tata Motors’ ROE and ROI have increased significantly in FY15 to 21% and 20% from 16% and 12% in FY14 respectively on account of growing revenue and profit margins, she says. Shruti expects the ROE to improve in FY16 compared to FY15 owing to expected better revenue from JLR segment.
Shruti also labours the point that Tata Motors is quoting at rock bottom valuations compared to its own historical average. She explains that the stock is presently trading at a price to earnings multiple of merely 7.9, compared to the average multiple of around 15 in the historical years. She points out that even the other valuation multiples such as EV/EBITDA and P/BV prove that the stock is presently undervalued.
At the end of the detailed analysis, Shruti Aggarwal concludes that Tata Motors is a “lucrative investment”. She has foreseen a 12-month target price of $50 for Tata Motors which is a whopping 100%+ upside from the CMP of about $21.
The same opinion has been expressed by Jinesh Gandhi and Jay Shah of Motilal Oswal in their latest report. Jinesh and Jay point out that JLR has “several triggers” which will dilute the impact of the China slowdown. They also emphasize that there is sufficient scope even within India for Tata Motors to prosper as the heavy vehicle industry is witnessing a cyclical recovery. The duo emphasizes that the valuations at 7.7x/6.2x FY16E/17E consolidated EPS are “very attractive for strong JLR franchise”. They have recommended a buy with a target price of Rs. 488, which is an upside of 69% from the CMP of about Rs. 288 (Rs. 334 at the time of the report).
Navin Matta and Sneha Prashant of HDFC Sec are also gung ho that Tata Motors is ripe for a buy. In their latest report they point out that while the management is muted about China, they are expecting a double-digit growth in the US and Europe markets. They also point out that the outlook for FY17 appears more promising with volume ramp-up of XE/D-Sport and soon-to-be-launched F-Pace, better utilisation of the engine facility (250k capacity), and incremental benefits from JLR’s platform consolidation efforts.
Matta and Prashant also point out that the steep fall in the stock price has “more than adequately” priced in the concerns relating to the China slowdown and that it is “ignoring” JLR’s strong new product cycle. The duo has predicted a target price of Rs. 445 for Tata Motors which is an upside of 54% from the CMP of Rs. 288 (Rs. 316 at the time of the report).
Now, the million dollar question is whether we will be able to muster the courage to buy Tata Motors while the blood is still gushing out of it?
When TM was at Rs.500 the so called experts gave target of Rs.630.
Although I don’t agree that 52 weak low price is sure way of gaining as wealth destroyers remain at 52 weak low most of the time.But in case of Tata motors I am in buying camp.But no need to jump ,buy it slowly in three or four parts scattered over next few months.Local HCV and MCV market is stabilising and world economy along with China may also stablise although at a lower level.Gains will not come because of dramatic improvement in performance but as passimism has been over done.Buy slowly but surely,not for doubling the price but for market beating return.
I am of the firm opinion that most appropriate time to a blue chip is during it’s head wind period.This the time when one gets multibagger results although buying requires a lot of courage during this period .Otherwise blue chips are not good investment in my opinion.It has been my experiences.
Blue chips are mostly a good investment. If you can get it while in reverse gair,it is better.You can buy blue chips most of the time except when market is near all time high.These are well tracked and with right information which is always available.You just stay away from metals,PSU ,aviation and commodity etc .If you remove these from NIFTY 100 or BSE 100,you might have huge profit.Sensex itself has delivered 18% CAGR returns over a large perioid.And with removel of said catagries, it is 22%.This is not small with sound sleep.Small cap and mid cap are stocks to be traded by experts or through small mid cap funds by average invester.Majority of small cap mid cap are wealth destroyers , but are bread and butter of brokers ,fieldom of speculators..Most investers has lost their shirt in this category.
Since blue chips or large caps are universally tracked, they are most of the time efficiently priced. Hence, investment in them, gives market returns.On the other hand, mid caps or small caps are more susceptable to market violatility, careful investment with required study definitely gives much better return,I am of this view.
Certainly you can make more profit in small/midcap because of higher growth due to lower base but only if you have the expertise for proper analysis.My views were certainly not for those who know what they are doing.These were only for common invester ,who are some time carried away by deliberate hype and noise around small mid cap ,ignoring the fundamentals.
While I agree that TML may be presenting a buy opportunity, the projections in the referred reports are too optimistic. JLR margins have peaked and they will decline. Increse in volume may offset (provided china stabilises) but the increase in net profit will not be as these research reports project. The controversy on Deisel needs to be closely watched as it may do a long term damage to the product (with Tesla gaining at the cost of the big three/four).
(1) Ist level thinking: China have a slowdown. So, It will affect its sales.
IInd level thinking: If a rich person is buying Jaguar or LR, does slowdown impact him so much that he will postpone or cancel his purchase?
(2) Ist level thinking: It has so much Capex plans, so it will impact its Free Cashflows.
IInd level thinking: Certainly, it will impact. But, It has a market cap. of 86K crore, C & CE is 32K Crore as of 31st march, 2015(Source: Valueresearchonline). So, We are getting this company at more cheaper level than we think.
(3) Ist level thinking: If there is further fall, what is Margin of safety?
IInd level thinking: Buy, DVR it is at ~27.5% discount to Tata motors. You may also get 5% more dividend in future if dividends are paid. Main thing is that we are getting more safety by buying DVR.
I feel that there is more panic than actual situation and management should come up with some commentary.
I think market is guessing, why Tata sons did not buy Tata steel stack of Tata motors ?and why partaily it has to be sold out side?
Commendable Second Lavel thinking inspired by HOWARD MARKS,CONGRATION! Keep it up!
It’s a blind buy, but you need to have patience to get gains , pessimism has to be overtaken by optimism.
In the near term Mr. Market is only a voting machine.. But…??
Short cut to lose your hard earned money
Going by the theory of Howard Marks, Tata Steel, Hindalco and several other metal stocks fall in the same category?? Please clarify.
If valuations of Tata Motors were so much lucrative, Tata Steel would not have sold the stake in open market. The insiders (promoter group) knows more than we do. Had the picture been so rosy, Tata Sons would have picked up the stake from Tata Steel.
Stock market exit because of difference of opinion based on varied perceptios.For every buyer , there is a seller; both actions are based on their perceptios, their time horizon.Both acts according to their covictions since their own money is invoved. Since all investment is done for future results which is always uncertain, it is dificult to guess who is more correct with out knowing their retionale,their time horizon. Even both could be right keeping in view their time hoizon. There is yet anothere simmilar case of Amtek Auto.
Volkswagon fallout may have a bearing on TAMO too. We need to wait and watch if anything of semblance of Volkawagon emission test failure will have a bearing on JLR too.