Tata Motors

India Equity Research | Automobiles Event Update

TATA MOTORS INR 774

Small car - Something special about it BUY

Tata Motors will unveil its long-awaited one lakh (INR 100,000) car (hereon referred as Jeh,
reportedly Ratan Tata’s favourite moniker for it), on January 10 at the Auto Expo 2008 in January 8, 2008
New Delhi. While the exact pricing of the car and its launch date is likely to be declared
later in this year, we believe that Tata Motors may have hit a sweet spot with that Ashutosh Goel
+91-22-2286 4287
particular price point. ashutosh.goel@edelcap.com

We analysed the passenger car markets of about 25 countries in the context of their Amol Bhutada
+91-22-2286 4287
income levels and affordability of entry-level cars. Our research shows that at an amol.bhutada@edelcap.com
affordability level (measured as price of a new car in terms of months of per capita income
Chinmay Parikh
in purchasing power parity basis) of about eight months income, passenger car sales hit a +91-22-4009 4686
chinmay.parikh@edelcap.com
sweet spot. With India’s per capita GDP at about USD 3,800 on PPP basis, and Tata
Motors intended price target for the car at USD 2,500, we believe the one-lakh car may be
right at the point where it can go on to garner unexpectedly large volumes. This is
precisely the key to making money at those pricing levels.

Although the overall cost structure of any car varies significantly across price points, we
have looked at the broad elements of the cost of designing, developing, and
manufacturing a car, and potential areas for Tata Motors to have cut and saved costs to
achieve the intended price point.

Reuters : TAMO.BO
We maintain our ‘BUY’ recommendation on the stock on the back of our expectations of a
Bloomberg : TTMT IN
big positive surprise from the company’s passenger car business, a robust recovery in the
commercial vehicles business, and the potential from value unlocking from its subsidiaries.
Market Data
What is at stake? 52-week range (INR) : 974 / 616

Ever since Tata Motors announced in 2001 its intention to develop a passenger car to sell Share in issue (mn) : 385.5

at INR 100,000, there has been a humongous amount of speculation, commentary, M cap (INR bn/USD mn) :298.3 / 7,553.1

admiration, criticism, and skepticism about the car. One finds it difficult to recall which Avg. Daily Vol. BSE/NSE (‘000) : 1,722.4

other product launch (including Marut-800 in 1985) in Indian automotive history has
generated even a fraction of the excitement, enthusiasm, and anxiety in the industry.
Share Holding Pattern (%)
While for Mr Ratan Tata and Tata Motors the project is something on which they are Promoters : 33.4
staking their prestige and hundred millions of dollars, various other parties involved or MFs, FIs & Banks : 16.4
affected by the project too have a lot at stake in it. FIIs : 15.9

Others : 34.3
Š Competitors are anxious about its impact on their market share, skeptical about its
success, and envious (another word for it starts with Jeh) about Tata Motors’ (a
newcomer in car making) gumption to undertake this ambitious exercise.
Š Customers are hopeful about the price, performance, and Tata Motors’ ability to 1,000 2,000
deliver the right product.
875 1,500
Š Vendors would like to see large sustained volumes to recover their investments.
('000)
(INR)

750 1,000
Š Environmentalists and urban planners are anxious about the pollution and road
congestion. 625 500
Š Investors are still figuring out how possibly it can give a decent return on investments.
500 -
Š Everybody else is just hugely curious about the hype and the fuss. Jan-07 Jul-07 Jan-08

1 Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Tata Motors

The price is right

Since so much, for Tata Motors, and for its vendors and investors, depends on the volumes Jeh
will be able to generate, we attempted to assess the market potential for a car at its price point.
Since there has not been any comparable product at a price point close to INR 100,000, we
adopted a novel approach – looking at the market from an affordability point of view. The
fundamental tenet underlying this approach is simply that owning a set of wheels is a common
aspiration across the global middle class, but the actual purchase depends on affordability.

We analysed a cross-section of international markets at various stages of the development of

their passenger car industry. Our finding was surprising – at affordability level (defined as price
of the cheapest entry level car in months of per capita GDP in PPP), passenger car sales
(expressed as annual sales per thousand population) jump significantly. Given that India’s per
capita GDP in PPP stands at USD 3,800 in 2007, the expected price of Jeh at USD 2,500-
3,500 translates into 7.9-11 months of per capita GDP. Thus, going beyond the roundedness of
the INR 100,000 figure, Tata Motors has targeted a statistical sweet spot.

Chart 1: Affordability versus car sales

60
Belgium
50
Car sales per '000 people

Germany
Ireland
40 France
USA
30 Greece

20 Malaysia China

10 Poland
Brazil India Philippines

0
4 8 12 16 20 24
Entry car price as months of per capita GDP-PPP

Source: Edelweiss research

A brief tour into the automotive history seems to confirm a similar trend - sales explode when
price points of entry level cars touch 7-8 months of income.

Š The Volkswagen Beetle was launched in 1932 in Germany at a price of Reichsmark (RM)
990, when the average industrial wage was about RM 32 per week – i.e. priced at 7.2
months income. It was launched in the US in 1969 at a price of USD 1,640, when the per
capita GDP was around USD 3,900, which means 5 months of per capita GDP.
Incidentally, the Beetle was meant to be a people’s car – that is where Volkswagen derives
its name from.

Š The Ford Model-T, the car that put America on wheels, when it hit peak sales in 1910 was
priced at USD 300, with per capita income in the US being at USD 400, again at 8 months
income.

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Tata Motors

Although it is difficult to explain this statistical sweet spot through causality, we believe the
reason for the jump in passenger car sales at a particular inflexion point has something to do
with the shape of the income distribution curve. Based on the NCAER’s demographic and
household income surveys, we observe that the slope of the income distribution curve becomes
significantly steeper at household income level of INR 200,000-500,000. While the current entry
car prices are targeting income groups of above INR 500,000, Jeh would bring down the
affordability income threshold for car ownership to the inflexion point.

Table 1: Cost of ownership comparison

Maruti 800 Maruti Alto Tata 1-lakh
Price of an entry level new car (ex-Mumbai) 205,442 245,810 100,000
Registration tax (one time) 8,218 9,832 4,000
Total price 213,660 255,642 104,000
Percentage of price given as loan 60.00 60.00 60.00
Down payment - - -
Loan amount 128,196 153,385 62,400
Effective interest rate (per cent) 11.00 11.00 11.00
Tenure of the loan (years) 3 3 3
EMI 4,197 5,022 2,043
Annual amount payable towards loan repayment 50,364 60,260 24,515
Fuel cost 22,222 25,000 16,000
Maintenance cost per year 2,500 3,000 2,000
Insurance (@ 3.5% on basic price) 7,190 8,603 3,500
Total annual expenditure towards owning the car 82,276 96,863 46,015
Percent of takehome pay spent on car 20 20 20
Threshold takehome pay 411,381 484,315 230,074
Takehome pay as a percentage of gross income 90 90 90
Threshold gross income 457,090 538,128 255,638
Adjusted for 2001-02 prices using CPI 365,672 430,502 204,510
Source: Edelweiss research

Chart 2: Income distribution curve (2006-07E)

150,000

121,852

No. of households ('000)

120,000

90,000

60,096
60,000

30,000
15,877
3,816 1,368 560 68
127
0
<90

90-200

200-500

500-1,000

10,000

>10,000
1,000-

2,000-

5,000-
2,000

5,000

Household income bracket (INR '000)

Source: NCAER, Edelweiss research

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Tata Motors

Table 2: Income distribution and trends

Income bracket
('000 households) (INR '000 p.a.) 2006-07E 2009-10E Annual addition
Deprived <90 121,852 114,394 (2,486)
Aspirers 90-200 60,096 75,304 5,069
Seekers 200-500 15,877 22,268 2,130
Strivers 500-1,000 3,816 6,173 786
Near rich 1,000-2,000 1,368 2,373 335
Clear rich 2,000-5,000 560 1,037 159
Sheer rich 5,000-10,000 127 255 43
Super rich >10,000 68 141 24
Total households 203,764 221,945 6,060
Source: NCAER

Further, a study by consultants AT Kearney forecasts that global demand for low-cost cars
(priced below USD 5,000) will grow to 17 mn units a year in 2020. The biggest opportunity is for
cars with a selling price below USD 4,000 and the biggest markets for such cars are India and
South East Asia (Tata Motors has submitted a proposal to Thailand to manufacture Jeh there
with an investment of INR 8-9 bn).

For other car makers, domestic as well as global, initial skepticism and criticism has given way to
grudging admiration and imitation. Over the past two years, almost every global player has
announced to build a low cost car for the emerging markets. Renault, which won accolades for
developing a low-cost sedan car (the Logan) for the Eastern European and later introduced it in the
Western European markets, has unsurprisingly chosen an Indian partner (Bajaj Auto) for
developing an even lower cost (USD 3,000) car likely to be launched in 2010. Several other global
automobile and component manufacturers (GM, Renault, Delphi, Visteon, and Bosch) have also
set up engineering and design centers in India to benefit from its low-cost engineering resources.

Table 3: Low-cost car plans of other players

Approx. price Current starting price model -
Players Concept (USD) Timeline price (USD)*
Tata Motors People's car 2,500-3,000 Car will be showcased on Jan 10th, Indica - 6,700
2008 in Delhi Auto Expo, followed by
commercial launch in H2, 2008
Bajaj-Renault New platform 3000 Concept car showcased on January Logan - 7,600
8th, 2008. Commercial production will
start in 2010
Cherry, China Based on QQ base model - - QQ - 3,150
Volkswagen Based on Up! concept revealed in 5,000-7,000 Will be launched in late 2009. Initial Gol - 9,100
Frankfurt auto show production will be of 100,000 units
Fiat Based on Uno/Mille platform NA Palio - 6,900
Ford New platform Production to start in next two years Ikon - 8,900
and initial production capacity will be of
2,50,000 units
GM Will be based on Chevrolet Beat NA 2010 Chevrolet Spark (India) - 6,200
concept displayed at Detroit auto Chevrolet Spark (China) - 4,700
Honda Will be based on Fit model NA 2009 Fit - 11,200
Skoda Based on Volkswagen Up! 5,000 - 7,000 Plans to produce 3,50,000 units Fabia - 9,000
Platform (including the small car project) in
developing countries by 2010
Plans to build on the current
Suzuki NA 2009 Maruti 800 - 4,000
Maruti 800
Toyota Will probably be based on Passo 6500 Will be launched in 2009 from the India Yaris - 9,500
model that Toyota and Daihatsu plant. Initial production will be of
co-developed 100,000 units
*Ex-factory prices
Source: Edelweiss research

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Vendors too are seeing big opportunities globally in low cost cars. Bosch has said it expects its
own revenues from low cost cars (EUR 7,000 or less) in emerging markets to reach EUR 1 bn
by 2010. It expects low cost car to comprise 13% of the world passenger car market by 2010.
Notably, Bosch is a leading supplier for Tata Jeh, for engine components such as injectors,
brakes, and electronics.

Table 4: Select vendors for Tata Motors’ small car

Components/sub-system Supplier
Engine components MICO Bosch
Engine block and head Rico Auto
Pistons, rings Shriram Pistons
Radiators Tata Toyo Radiators
Drive shafts GKN Driveline
Gearboxes Cast master/CV Tech JV, Kinetic Engg., Hindustan Motors
Clutch Rico Auto
Control cables Suprajit Industries
Steering system Sona Koyo, Rane (Madras)
Bearings Tata Bearings
Sheet blanks Tata Ryerson
Sheet metal work (front-end) Omax Auto
Door frames Tube Investments
Seating Tata Johnson Controls
Switches, horns Minda Industries
Wiring harness Tata Yazaki
Lighting Lumax Industries
Battery Tata GY Batteries
Brakes Bosch Chassis Systems
Shock absorbers Gabriel India
Source: Edelweiss research

The product is right

Tata Motors has been understandably secretive throughout its development phase about the
detailed specifications and engineering of Jeh. However, since its success depends on its
meeting the expected quality, performance, and aesthetic criteria, we have put together
evidence gathered from a variety of sources – public comments of various company officials
including Mr Ratan Tata himself, the vendors for the car, and company sources – to develop an
idea of what can be expected from the product.

Aesthetics and performance

Š Officially, the company has provided only the broadest specifications for Jeh – it would seat
4-5 people comfortably and sport a 600-700cc rear engine in petrol, and diesel options to
produce about 30-HP, and give a fuel economy of about 25 kmpl.

Š Dr RA Mashelkar, former director general of Council of Scientific and Industrial Research

(CSIR), author of Automobile Fuel Policy of the Government of India, and member of Tata
Motors board of directors, recently described his experience of driving Tata Jeh as follows:
“The car is acceptably rapid, powered by petrol, has a sloping front, is pleasing to eye and
is capable of carrying four people at a time”. He said the performance is comparable to
Maruti 800, the cheapest car currently available in India.

Š Some senior management officials of vendors also claim the car to be extremely good
looking.

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Tata Motors

Quality and safety

Š As far as the build, quality, and fit-and-finish of the car is concerned (historically the biggest
bugbears for Tata Motors’ passenger vehicles), we believe the company has invested a
significant amount of time, effort, money, and managerial resources to learn from the
quality challenges it faced with Indica and other products. This time, the company is
determined to get its product quality right at the first attempt. In addition to the
enhancement of its in-house design and engineering capabilities and significant
investments in various facilities such as crash testing and NVH testing, Tata Motors has
recently acquired INCAT, UK (a leading automotive engineering and design company) and
also set up Tata Motors European Technical Centre in the UK to enhance its product
development capabilities.

Š In face of continuous criticism from other car manufacturers claiming that it is not possible
to meet safety standards at INR 100,000 price point, Mr Ratan Tata has steadfastly
maintained that the car would meet all extant emission and safety regulations in the
countries it is launched. While not much is known about the safety features of Jeh, at the
promised fuel economy of 25 kmpl, it would not be difficult for it to meet the current and
foreseeable emission norms.

Impact on urban infrastructure

Š Admittedly, there are concerns about the impact of large volume sales of the car on traffic
in major cities that are already struggling to cope with their ever growing vehicle population.
There are however three angles to this issue. Firstly, given the target audience for Jeh, it is
likely to generate a large proportion of its sales from non-metro and Tier-II and Tier-III cities,
where traffic congestion is not a major issue, at least at present. Secondly, and more
importantly, while it is a valid issue, it is not a reason big enough to stymie innovation and
prevent customers from buying the product if they so wish. Thirdly, we expect the large
volumes that Jeh would generate to further mobilise government effort, especially at the
local level, to improve intra-city road infrastructure. For example, the huge surge in air traffic
created by low-cost airlines, such as Air Deccan, created an increased sense of urgency
among policy makers to improve the airport infrastructure.

The cost is right too

If there is significant market potential and the product is likely to meet the expectation of
customers, then the crucial question of relevance to the investors is whether Jeh would earn
sufficient margins and returns on the huge investments that would go into its development and
launch. Our estimate is that Tata Motors would have invested about INR 12-15 bn on the
design and development, and on setting up the manufacturing facilities for Jeh. This compares
well with about INR 17 bn (USD 400 mn) that the company had spent on developing and
launching the Indica in 1999, and about USD 1-1.5 bn that a western manufacturer would
spend on developing a brand new model.

As we have pointed out earlier, much depends on the volumes, but needless to say, equally
important is the cost structure. While the final selling price would be declared much later, here
we take a broad brush look at the cost structure of car making and empirical evidence of radical
cost saving measures used successfully by various car makers, to identify potential area, which
would enable Tata Motors to achieve the targeted price point, profitably.

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Tata Motors

Consumer don't pay for junk, costs have to be cut intelligently

Statistical sweet spots are unlikely to lure even the most price conscious consumers to
substandard products in the highly competitive passenger car market. Moreover, given that for
most buyers a car is an aspirational purchase, they are unlikely to compromise on the basic
functionality and design even in a no-frills car.

The following are three broad stages of car-making, which have a bearing on its ultimate cost
structure:

Š Design – product concept, styling, technical specifications, and features

Š Development – detailed engineering, vendor development, prototyping, testing, tooling,

and pre-production

Š Manufacturing - manufacturing facilities, manufacturing processes, procurement of

materials and components, fabrication, and assembly.

While the manufacturing phase comprises a large part of the direct and obvious costs (such as
materials, components, labour, and manufacturing), according to automobile industry thumb-
rule, the design and development stage really determines more than half of the manufacturing
costs. In other words, nearly half of the manufacturing costs are “designed in”. As a result, to
achieve radical cost reduction, Tata Motors would have had to adopt a different approach right
from the initial design stage. We explore below some of the possibilities based on our
interaction with industry sources and the experience of other low-cost manufacturers.

Š The design stage: Keep it simple

Keeping the design – in case of overall styling and that of every component – keeping it
simple is the most effective way to reduce costs across the board from tooling to
manufacturing to assembly. For instance, using straight lines and flatter skin panels, rather
than curves, on the exterior body reduces the cost of dies used to make them. Another
example of simpler design reducing manufacturing complexity is Tata Motors’ use of rear
engine; separating the steered wheel and the driven wheel reduces complexity of the drive-
train and steering linkages.

Š Product development stage

While benefitting from its experience in developing the Indica and taking advantage of the
overall low-cost advantage of India, Tata Motors would also use several other techniques
to reduce development costs, including:

Š Using proven but alternate technologies; for instance, the base version of Jeh is likely
to sport a variomatic transmission commonly used in gearless scooters, golf-cars, and
snowmobiles. We believe the cost of this is about INR 3,000 compared to INR 12,000
for a typical manual transmission.

Š Higher level of outsourcing of the development and manufacturing of sub-systems

and components to vendors, to reduce development costs and time and assembly
costs. Tata Motors would procure fully assembled gearboxes from its vendors rather
than procuring gears and components and assembling them in-house as it does for
other products.

Š Use of alternate materials (plastics and aluminium in place of steel).

Š Dual purpose components to reduce the number of components; for instance, the
seat riser in Jeh is a mounting as well as a structural part

Š
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Tata Motors

Š Use of symmetrical components (to reduce the number of dies and tools required); for
instance, Logan uses symmetrical outer rear view mirror, saving USD 3 per car.

Š Use of components from other models such as the ACE or the Indica.

Š Reducing the number of components. A company official indicated that the number of
bolts have been reduced using special welding techniques, which has reduced the
weight of the car. Similarly, the car is likely to sport a single windshield wiper instead
of the commonly used pair.

Š Reducing weight of components across the board; for example by using a thinner
gauge of steel, where it is not part of the structure. Our talks with component
manufacturers indicate a disproportionately lower realisation for smaller and lighter
components.

Tata Motors incurred development costs of about INR 2 bn and tooling costs of INR 750
mn for Indica. We believe that these numbers can be significantly improved, given that the
simpler design and smaller (and hence lighter) size of Jeh.

Š Manufacturing stage: Small car, big volumes

At the manufacturing stage, Tata Motors is likely to count on large volumes, higher level of
outsourcing, and new manufacturing techniques, to bring down the costs.

With the large fixed capital investment (estimated at INR 7-8 bn for the manufacturing plant
and another INR 3-5 bn for product development and tooling, but excluding investment by
the vendors), Tata Motors is likely to defray the fixed manufacturing costs over a large sales
volumes. In our estimate, Jeh would need to earn cash profits of INR 10,000-15,000 per
unit to earn 20% on the total project cost. Large unit volumes also impact the vendor costs
in a similar manner.

Tata Motors has also chosen to outsource a larger proportion of the cost structure of the
small car to its component vendors, who with their lower overheads have more efficient
cost structures. We expect very little in-house manufacturing and fabrication (except
engine machining, skin panel-stamping, welding, painting, and vehicle assembly). Some of
the systems, assembled in-house, will be outsourced to vendors. For instance, gearbox will
be procured completely assembled from Kinetic Engineering and Hindustan Motors.

In its own manufacturing facility, we would expect a lower level of automation to take
advantage of lower wage costs, compared with fixed investments for automation. Going
forward, when volumes cross a certain threshold, Tata Motors is likely to set up satellite
plants for assembling the vehicle close to the markets. Based on our interactions, we
understand the vehicle has been designed with a single-minded focus on ease of
manufacturing and assembly to reduce defects and costs.

Table 5: Economics of the small car

Target income bracket INR 25-45k pm Investment INR 15 bn
Addressable market (total households) 7 mn Expected ROI 20%
Annual addition to households 0.8 mn Required cash profit INR 10,000 per unit
Take up rate 25-30% Required margin 8-10%
Expected sales 0.25-0.3 mn Industry margin 14-15%
Source: Edelweiss research

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Tata Motors

Company Description

Tata Motors is India's largest automobile company with a presence in commercial and passenger
vehicles. It is the leader in nearly all commercial vehicle segments and second largest in the
passenger vehicles market with products in the compact and mid-size car as well as utility vehicle
segments. The company is the world's fifth largest medium and heavy commercial vehicle
manufacturer. Tata Motors is listed on the New York Stock Exchange (since September 2004). It
derives about 10% of its revenues from exports. The company has plants in Jamshedpur, Pune,
Lucknow and Dharwad, and R&D centers in Pune, Jamshedpur, Lucknow, in India, and South Korea,
Spain, and the UK.

Investment Theme

Tata Motors is in a strong position to ride the growth seen in commercial vehicles due to increased
industrial activity. For the company’s passenger car business, the recent alliance with Fiat
strengthens its position significantly from the standpoint of access to world-class technology and
overseas market in a highly competitive environment. In addition, the company has significant
potential for value unlocking from its investments in a variety of automotive and related businesses,
such as auto components and automotive and engineering design, and financial services.

Key Risks

A slowdown in economic activity may affect CV sales significantly. Another key risk is increasing
competition in the passenger vehicle space, especially in diesel cars, and also in the compact
segment. Also, increases in input prices could affect margins, as competition limits the company’s
ability to pass on cost hikes. The company plans to invest significant amount of money in new
product launches. Non-acceptance of these products in the market could cause a substantial
financial setback for the company.

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Tata Motors

Financial Statements

Income statement (INR mn)

Year to March FY05 FY06 FY07 FY08E FY09E
Total volume (nos) 399,561 454,345 578,805 642,244 721,108
% Growth 27 14 27 11 12
Income from operations 173,135 204,702 271,205 307,766 348,662
Raw material cost 117,855 140,070 190,253 216,561 243,826
Power and fuel 2,378 2,585 3,274 3,476 3,952
Employee cost 10,393 11,431 13,678 15,320 17,311
Factory and administrative expenses 20,453 24,527 33,648 37,482 43,301
Selling and advertising expenses 3,583 4,700 6,373 7,557 8,248
Total operating expenses 154,662 183,314 247,226 280,395 316,638
EBITDA 20,654 24,477 29,750 31,717 37,407
Add: Manufactured goods capitalised 2,181 3,089 5,771 4,346 5,383
Total other income 3,354 3,240 5,915 6,341 6,905
PBDIT 24,008 27,717 35,664 38,057 44,312
Amortisation of deferred expenses 671 738 850 1,050 1,200
Interest 2,178 2,935 3,685 4,800 5,175
Depreciation and amortisation 4,502 5,209 5,863 6,391 8,102
Provisions 97 (97) 11 0 0
Employee separation cost 42 40 3 0 0
Profit before tax 16,519 18,891 25,253 25,816 29,835
Provision for tax 4,150 5,245 6,597 6,454 7,160
Adj. profit after tax* 12,370 13,646 18,656 19,362 22,675
Extraordinary items 0 1,643 479 0 0
Profits after tax 12,370 15,289 19,135 19,362 22,675
Consolidated profit after tax* 13,853 15,638 21,221 22,384 26,676
Shares outstanding 361.8 382.9 385.4 390.9 407.2
Dividend per share 14.3 14.8 17.5 18.0 20.2
Dividend payout % 41.8 37.1 35.3 36.3 36.3
*Excluding extraordinary income/expenses

Common size metrics- as % of net revenues

Year to March FY05 FY06 FY07 FY08E FY09E
Operating expenses 89.3 89.6 91.2 91.1 90.8
Depreciation 2.6 2.5 2.2 2.1 2.3
Interest expenditure 1.3 1.4 1.4 1.6 1.5
EBITDA margins 11.9 12.0 11.0 10.3 10.7
Net profit margins 7.0 7.4 6.9 6.2 6.4

Growth metrics (%)

Year to March FY05 FY06 FY07 FY08E FY09E
Revenues 32.4 18.2 32.5 13.5 13.3
EBITDA 18.9 18.5 21.5 6.6 17.9
PBT 27.8 14.4 33.7 2.2 15.6
Adj. net profit 52.6 10.3 36.7 3.8 17.1
Adj. EPS 50.6 4.2 35.8 2.3 12.4

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Tata Motors

Balance sheet (INR mn)

As on 31st March FY05 FY06 FY07 FY08E FY09E
Equity capital 3,618 3,829 3,854 3,909 4,072
Pref. capital 0 0 0 0 0
Reserves & surplus 37,496 51,542 64,843 81,347 109,272
Shareholders funds 41,114 55,371 68,698 85,257 113,344
Deferred tax liability (Net) 5,653 6,225 7,868 7,868 7,868
Secured loans 4,898 8,228 20,220 40,260 39,555
Unsecured loans 20,056 21,141 19,871 15,654 10,134
Borrowings 24,954 29,368 40,091 55,914 49,689
Sources of funds 71,721 90,965 116,657 149,039 170,901
Gross block 66,120 79,716 87,758 111,952 149,418
Depreciation 34,543 44,015 48,945 55,336 63,439
Net block 31,577 35,700 38,813 56,616 85,980
Capital work in progress 5,388 9,512 25,133 27,133 23,633
Intangible assets 0 0 0 0 1
Investments 29,121 20,152 24,770 32,344 32,344
Inventories 16,014 20,122 25,010 28,985 31,071
Sundry debtors 7,986 7,158 7,822 9,938 12,240
Cash and bank balances 20,050 11,194 8,268 10,772 10,460
Loans and advances 26,749 58,077 60,260 60,286 60,786
Other current assets 61 62 59 59 59
Total current assets 70,860 96,613 101,418 110,040 114,616
Sundry creditors and others 54,146 59,003 59,935 63,254 70,590
Provisions 11,261 12,150 13,643 13,900 15,101
Total current liab. and provisions 65,407 71,154 73,578 77,154 85,691
Net current assets 5,454 25,460 27,841 32,886 28,925
Others 182 141 101 61 20
Uses of funds 71,721 90,965 116,657 149,039 170,902
Book value per share (BV) (INR) 114 145 178 218 278

Cash flow statement (INR mn)

Year to March FY05 FY06 FY07 FY08E FY09E
PBIT 17,209 20,588 26,795 28,525 32,824
Less: Actual tax paid 4,150 5,245 6,597 6,454 7,160
Less: Tax shield on interest 668 900 1,130 1,472 1,587
Add: Tax on int. & investment income 704 589 922 963 1,038
NOPLAT 13,096 15,031 19,990 21,562 25,115
Add: Depreciation 4,502 5,209 5,863 6,391 8,102
Gross cash flow 17,598 20,241 25,853 27,953 33,217
Less: Capital expenditure 8,989 13,457 24,596 26,194 33,966
Less: Working capital investment (5,180) (1,909) 3,775 2,772 (2,948)
Less: Increase in other assets 15,183 0 (2) 0 0
Add: Increase in other liab./provisions 7,303 557 648 257 1,201
Add: Extra-ordinary income 0 0 0 0 1
Free cash flow 5,909 9,250 (1,868) (756) 3,401

11
Tata Motors

Ratios
Year to March FY05 FY06 FY07 FY08E FY09E
ROE (%) 30.1 27.6 27.9 22.7 20.0
ROCE (%) 28.3 25.8 26.6 21.7 21.5
Inventory days 34 37 34 35 33
Debtors days 17 13 11 12 13
Fixed assets T/o (x) 2.6 2.6 3.1 2.7 2.3
Debt/Equity 0.6 0.5 0.6 0.7 0.4

Valuation parameters
Year to March FY05 FY06 FY07 FY08E FY09E
EPS (INR) 34.2 39.9 49.6 49.5 55.7
Adj. EPS (INR) 34.2 35.6 48.4 49.5 55.7
Y-o-Y growth (%) 50.6 4.2 35.8 2.3 12.4
Consolidated EPS 38.3 40.8 55.1 57.3 65.5
CEPS (INR) 46.6 53.5 64.9 65.9 75.6
P/E (x) 22.6 19.4 15.6 15.6 13.9
P/E (x) Consolidated 20.2 19.0 14.1 13.5 11.8
Price/BV (x) 6.8 5.4 4.3 3.5 2.8
EV/Sales (x) 1.5 1.4 1.1 1.0 0.9
EV/EBITDA (x) 12.4 12.0 10.3 9.9 8.6

12
Tata Motors

Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021, Board: (91-22) 2286 4400, Email: research@edelcap.com
Naresh Kothari Co-Head Institutional Equities naresh.kothari@edelcap.com +91 22 2286 4246

Vikas Khemani Co-Head Institutional Equities vikas.khemani@edelcap.com +91 22 2286 4206

Shriram Iyer Head Research shriram.iyer@edelcap.com +91 22 2286 4256

Coverage group(s) of stocks by primary analyst(s): Auto/Auto Components:

Ashok Leyland, Tata Motors, Bajaj Auto Ltd, Maruti Udyog, Mahindra & Mahindra, Hero Honda Motors, TVS Motor, Bharat Forge and Amtek Auto

Tata Motors Recent Research

Date Company Title Price (INR) Recos

1000
920 Buy 20-Dec-07 Tata JLR – Is it money down 711 Buy

840 Motors the drain; Event Update

(INR)

Buy
760 Buy
Buy 18-Dec-07 Auto Fact Sheet
680 Buy Buy
600 14-Dec-07 Auto Sales Update
Jan-07

Feb-07
Mar-07
Apr-07
May-07

Jun-07
Jul-07
Aug-07

Sep-07
Oct-07
Nov-07
Dec-07
Jan-08

20-Nov-07 Auto Fact Sheet

Distribution of Ratings / Market Cap Rating Interpretation

Edelweiss Research Coverage Universe
Rating Expected to
Buy Accumulate Reduce Sell Total
Buy appreciate more than 20% over a 12-month period
Rating Distribution* 107 45 18 3 193
Accumulate appreciate up to 20% over a 12-month period
* 13 stocks under review / 7 rating withheld
Reduce depreciate up to 10% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn

Market Cap (INR) 104 69 20 Sell depreciate more than 10% over a 12-month period

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