Is the Tata Motors Stock Running Out of Juice?

Editor's note: Nearly 28,000 astute readers of the Profit Hunter have signed up for Richa Agarwal's Smallcap Revival Summit! Richa is super excited to share her highly profitable strategy of investing in smallcaps as well as her top 3 small-cap stocks to buy. Join the Smallcap Revival Summit here.

Every big WhatsApp group has a few car enthusiasts.

Mine is no different. There are a couple of guys who know their cars like the back of their hands.

They're willing to dish out top class advice to anyone willing to listen.

In fact, I owe the thousands of happy miles I have clocked in my own set of wheels to these two gentlemen.

Of late, I have seen a perceptible change in the way they think about home grown brands, especially the ones sporting the Tata badge.

They believe that Tata Motors has definitely upped its game when it comes to cars, offering a much better bang for the back in terms of safety, reliability, and style. So much so that they've even persuaded a few in the group to go for a 'Tata' as their next car.

Well, it is not just in these chatrooms that Tata Motors is a hot commodity. It has also set the Indian stock market on fire with its stellar run in the last year or so.

The company is up a huge 5x from its 52-week lows and looks set for much more.

However, any strong connection between the company's share price jump and its much improved car line up should be taken with a pinch of salt.

The company's car division is a small contributor to its overall fortunes.

What really moves the needle for the company in terms of its fundamentals is its overseas subsidiary of Jaguar Land Rover and its commercial vehicles division.

And therefore, investors should track these divisions closely if they have to take a call on the company as an investment candidate.

To be honest, even this wasn't required few months back when the stock had crashed to its multi-year lows. The crash was a result of the market extrapolating its recent dismal results well into the future.

The company incurred a loss of Rs 400 bn in FY19 and FY20 combined and this sent investors running for cover.

The coronavirus pandemic added to the misery and this sent stock hurtling to a price level not seen since 2009. It crashed to a 10-year low.

Perhaps it deserved this fate if it had no way of staging a comeback from the losses it incurred in FY19 and FY20.

BREAKING: Full Details of the #1 Investment of the Decade...

However, this is the same company that recorded average earnings of Rs 110 bn between FY11 and FY18 (an average EPS of around Rs 30 per share).

It was moving heaven and earth in order to cut costs and improve its product quality.

If you were among those who believed the recent losses were temporary and it could again earn Rs 30 per share, then you were getting the stock at an approx. intrinsic value of Rs 300 per share (assuming a price to earnings ratio of 10x) at a fraction of that price.

Therefore, had you pulled the buy trigger you are probably laughing all the way to the bank right now.

It was a classic case of 'Heads I win, Tails I don't lose much'.

However, that's all in the past now.

The big question that needs answering right now is whether the stock is an attractive proposition at these prices.

Is there still enough juice left in the stock price considering it has touched Rs 500 just a few years back? Can it do an encore and break past that barrier again and rise even higher?

Well, there's something called as intrinsic value based on quantitative analysis and an intrinsic value based on qualitative analysis.

The former needs a high Emotional Quotient (EQ) for its evaluation and latter needs a high Intelligence Quotient (IQ) in my opinion. You need to figure out the game you are playing.

If you are paying the high EQ game, you have to use the past as a rough guide to the future and arrive at the company's value based on its past performance. You need to figure out whether the past has any chance of repeating itself.

If it has and you are getting a big margin of safety in valuations, you should act against the prevalent emotion of fear and go ahead and buy the stock.

For this kind of an investor, a good entry point was between Rs 60 and Rs 200 per share.

In my personal opinion, the gains from hereon may depend more on qualitative analysis and less on quantitative.

Whether the stock will reach a new all-time high will rest upon how brilliantly it executes its strategy and the competitive landscape within the industry.

It may require an in-depth analysis of the different opportunities and challenges facing the company.

And after all this, if you are still convinced the company's best days are ahead of it, you can stay put or maybe even increase your exposure to the stock.

Please note that determining the intrinsic value of any stock is a hugely subjective exercise. Of course there are broad guidelines and techniques that one needs to follow and has to be consistent about.

But beyond this, an investor is pretty much on his own. He needs to do the leg work and come out with his own version of a company's intrinsic value.

For me, the risk-reward ratio from a quantitative standpoint is perhaps not that attractive anymore. Also, qualitative analysis is something I will leave to the guys much smarter than me.

So there you go. That's my view on Tata Motors. What do you think?

Good Investing,


Rahul Shah
Editor, Profit Hunter
Equitymaster Agora Research Private Limited (Research Analyst)

PS: Nearly 28,000 astute readers of the Profit Hunter have signed up for Richa Agarwal's Smallcap Revival Summit! Richa is super excited to share her highly profitable strategy of investing in smallcaps as well as her top 3 small-cap stocks to buy. Join the Smallcap Revival Summit here.