The main purpose of this report is to evaluate and determine whether the market has valued TATA MOTORS correctly. The Shareholder value analysis for Tata Motors is done using TSR and EVA approaches to analyse how successful the company has been in delivering value to its shareholders for the past 5 years. The report also makes use of three different methods namely Net Asset Value, Price/Earnings ratio, and Discounted Cash Flow to perform the evaluation of the equity in Tata Motors. Since these calculations are done with limited information, sensitivity analysis has been carried out to get the range of values of Tata Motors. Additionally, an analysis of the share price movement of the past 12 months has been done. The conclusion includes analysis of all the three valuation techniques and based on that it is finally concluded that DCF is the best method among the three to arrive at the market value of Tata Motors.
Introduction to the Company
Tata Motors Limited, established in 1945, is India's largest automobile company. The company is the world's second largest bus manufacturer and the world's fourth largest truck manufacturer. With over 4 million Tata vehicles on Indian roads, Tata Motors is the country's market leader in commercial vehicles and among the top three in passenger vehicles (Tata Motors 2010).
Tata Motors acquired the Jaguar Land Rover (JLR), a British automotive business in 2008. The company's turnover for the year 2008-09 ended at Rs. 28,599 crores, a decline of 13.6% from the year ago figure. Currency volatility and high interest rates affected the overall profit of the company. Profit after tax was Rs. 1001 crores, a decline of 50.7% (Annual Report 2008-2009).
Net Revenue
(Excluding excise duty) Operating Profit Profit after Tax
Figure 1: Tata Motors' financial performance (Source: Tata Motors Annual Report 2008-09)
Note 1: Numbers on the vertical axis are Rs. in crores
Key Financial Highlights of the Company (Figures in Indian Rupees Rs. in Crores)
Financial Parameters
2005
2006
2007
2008
2009
Turnover
20648.66
24290.52
32064.67
33577.11
29525.24
Profit After Tax
1236.95
1528.88
1913.46
2028.92
1001.26
Net Profit Margin (%)
5.99%
6.29%
5.96%
6.04%
3.39%
Net Current Assets
545.36
2545.95
2784.05
(272.85)
(1143.82)
Dividends paid(Including Tax)
517.15
567.78
676.39
659.68
345.70
Dividend Payout Ratio Net Profit
41.68
37.13
35.34
32.51
34.52
ROCE (%)
28.5%
26.5%
25.9%
19%
6.4%
Table 1: Company's financial highlights (Source: Moneycontrol 2010 & Annual Report 2009)
Shareholder Value Analysis
Total Shareholder Return (TSR)
Total Shareholder Return indicates the overall return received by the investors (capital gain plus dividend) expressed as a percentage of their initial investment.
Since the beginning of the year 2006, Tata Motors has been experiencing downward TSR and this is a matter of concern. However, this concern can be solaced by considering the TSR of Tata Motors' competitors, Ashok Leyland and Maruti Suzuki. Even these companies have been experiencing a drop in their TSR for the past 3 years (Figure 2). Due to the slowdown in the automobile industry, the company has reduced the dividend per share in 2008-09 by 60% from what was in 2007/08. This is mainly due to the company's performance, which observed a decline in its profit by nearly 50% (Annual Report 2008-09).
The primary reasons that contributed to the decline in the TSR are the collapse of the global financial sector that resulted in lack of access to credit and working capital and the increase in fuel prices coupled with unprecedented increase in rubber and steel prices, all of which caused the prospective buyers to defer their spending on automobiles. Besides these, the other factor that hurt the company was the acquisition of Jaguar Land Rover (JLR) Company in June 2008. Sales of these two brands as well as the passenger vehicle exports declined, thereby affecting the performance of the Company.
Total Shareholder Return in %
Figure 2: Graph indicating the TSR of Tata Motors and competitors for a 5 year period
By looking at the Share Value Analysis, we might get an impression that it is risky to invest in Tata Motors. However, it would be good to consider the following factors as well while making a decision. First, the most acclaimed Tata Nano, the world's cheapest car, has been launched in the Indian market. The announcement of the launch of this car caused an initial booking of 200,000 units even though the car was still in the production phase. This car is mainly targeted at 350 million middle class consumers of India. Second, the global automobile sector is slowly recovering (CENS 2010) and this will gradually compensate for the huge investment made on Jaguar and Land Rover brands through better sales of these vehicles in Europe. Finally, except in the year 2008/09, in the years prior to this, the Company has shown commitment to the shareholders by providing dividend per share at average price of Rs. 13.80, which is nearly 130% greater than the price declared for 2008-09.
In a nutshell, the main reason for the Company's poor perform is the global economic downturn. If not for this, the Company would have continued to be generous to its shareholders (Appendix A). Hence, it can be concluded that Tata Motors has been fair to its shareholders.
Economic Value Added (EVA)
EVA is a tool for assessing the amount of value created by a Company. EVA helps the shareholders of Tata Motors know the benefits of their investment in the Company. Figure 3 has the EVA calculated for the year 2008-09 and the figure seems to be devastating to the Shareholders because of negative EVA, which indicates that the Company has destroyed value. This is mainly due to the global economic slowdown and the acquisition of Jaguar Land Rover Companies.
Economic Value Added
EVA = Net Operating Profit After tax - (Ke * Equity)
Profit After Tax = 1001.26 Crores
Ke = 17.76% (From CAPM model under Appendix F)
Equity = Total Shareholders' Funds less Miscellaneous Expenditure = 12228.13 Crores
EVA = 1001.26 - (0.1776 * 12228.13)
EVA = -1170.46 Crores
Figure 3: Calculation of EVA for the year 2008/09
Though EVA is a simple powerful tool for assessing performance, it is backward-looking, i.e. a measure of past performance (Pike and Neale 2009). Figure 4 below shows the EVA of Tata Motors for the past 5 years based on the values calculated under Appendix B.
Figure 4: EVA of Tata Motors for the past 5 years (Source: Appendix B)
From Figure 4, it can be noted that, except in the year 2008/09, Tata Motors has generated positive value to its shareholders by maintaining its EVA positive.
Dividend Policy
Dividend Payout ratio
The Dividend Payout Ratio (DPR) gives an idea of how well the earnings support the dividend payments. As the companies mature, they tend to have higher payout ratios.
TATA Motors
2004-05
2005-06
2006-07
2007-08
2008-09
Earnings Per Share (EPS)
34.38
40.57
49.76
52.64
22.70
Dividend Per Share (DPS)
12.50
13.00
15.00
15.00
6.00
Dividend Cover (EPS/DPS)
2.75
3.12
3.31
3.51
3.78
Dividend Payout ratio (%)
36.35%
32.04%
30.14%
28.50%
26.43%
Share Price (Market value)
Dividend Yield (%)
386.93
3.23%
871.73
1.50%
680.25
2.21%
582.76
2.57%
180.30
3.32%
Table 2: Dividend Statistics (Annual Report 2008-2009 and Moneycontrol 2010).
The Dividend payout ratio of Tata Motors has gradually declined from 2004/05 to 2008/09. However, there are no drastic variations, in terms of percentage, in the dividend payouts. The company has been investing in the business through innovations and acquisitions and hence continues to be in the growth mode. The company has invested heavily in developing the world's cheapest car and also in acquiring JLR brands.
Dividend Yield
Dividend Yield is used to measure the percentage return on investment in a share. Tata Motors has an average dividend yield of 2.57%, which is fairly reasonable. From Table 2, in the year 2008/09, the Company's dividend yield got increased to 3.32% from 2.57% in the previous year. It can thus be inferred that the Company's share price has fallen in 2008/09. On the other hand, it should also be noted that the stocks with high dividend yield are a better bet when the markets are falling because, as the share price falls, the percentage of dividend yield rises and vice-versa. From the investors' perspective, Tata Motors' dividend yield for the year 2008/09 has been satisfactory (Table 2).
Share Price Movement - Market Value of Equity - Last 12 months
The semi-strong form of the Efficient Market Hypothesis (EMH) supposes that prices reflect all publicly available information and instantly change to reflect any new information. Tata Motors trades on Bombay Stock Exchange (BSE), which has over 4700 Indian companies listed on it.
Figure 5: Historic Graph between 2/1/2009 and 31/1/2010 (Tata Motors 2010)
Figure 5 plots the share price movement of Tata Motors for the last 12 months that ended on Jan 31st of this year. From the above graph, it is evident that Tata Motors' share price has gradually increased since February 2009. The Company has outperformed the BSE index, especially after May 2009. The reason for this is the result of the 2009 general elections of India, where a single party received a clear mandate and was voted back to power. It stimulated confidence in the investors.
The Company's share price started to increase from Feb 2009. The share price of Rs. 137.60 at the beginning of Feb 2009 had reached Rs. 340.30 by end of Jun 2009, an increase of nearly 147%. The main reason for this increase is that the Company had announced the delivery of the much hyped car, Tata Nano. This car was due for launch in 2008 itself but for several reasons it got delayed. The automobile experts had speculated that Tata Motors would increase the price of the world's cheapest car to compensate for the losses that the Company had incurred due to delayed launch and also that the government had increased the excise duty by 2% in the latest budget. However, the speculations were proved wrong when Mr. Ratan Tata, Chairman of Tata, announced that his Company would launch the car at the earlier committed price itself to the first 100,000 customers despite rising input prices. This boosted confidence in prospective investors (Zee News 2009).
The share price started to decline after June 2009 and declined by 21% in the second week of July. Tata Motors had borrowed a loan of $3 billion in the year 2008 in order to acquire JLR Company. About $2 billion of the borrowed money had to be repaid during June 2009. The company was in no better position than previous' to repay the hefty amount and hence decided to refinance again. When this news was revealed, the share price tumbled and fell steeply (Livemint 2009).
The Company announced its second quarter results on Sep 30th 2009. Profit after tax was Rs.729.14 crores (Q2 2008-09: Rs.346.99 crores), an increase of 110.1%. The sales of Fiat, Jaguar and Land Rover vehicles grew by 27.3% in the domestic market (Quarter Results 2009). With this positive result, the share price of the company started to rise by around 5% after Sep 2009 (Figure 5).
On October 8th 2009, Tata Motors' CEO announced that the company had repaid fully the remaining $750 million of the borrowed $3 billion loan that was taken for JLR acquisition. Share prices reacted sharply to this news on October 9th with share price plunging 6.66% to end at Rs. 548.30 (The Financial Express 2009).
Since the price of input materials and also crude oil has fallen when compared to what was in 2008, the company can yield considerable benefits through cost efficiencies. The share price as on Jan 29th 2010 was Rs. 694.35 compared to Rs. 149.65 as on Jan 30th 2009. In one year, the company's share price has gone up by 334%. This performance truly instils confidence in shareholders.
Equity Valuation
Valuation is the process of estimating the potential market value of an asset or a company. Valuation of companies is by no means an exact science. If there is an active and efficient market in the company's shares, it should provide a reliable indication of value. With a well-established market, if the asset is fairly homogeneous, valuation is relatively simple (Pike and Neale 2009).
For Tata Motors, which is partly financed by debt capital, the value of its entire stock of assets may differ from the value of the shareholders' stake (Pike and Neale 2009, p.285).
The three basic valuation methods are Net Asset Value, Price-earnings multiples and Discounted Cash Flow.
Net Asset Value (NAV)
NAV is a valuation approach in which the calculation of the equity value in a firm is done by netting the liabilities against the assets (Pike and Neale 2009). NAV may represent the value of the total equity or it may be divided by the number of shares outstanding to get the per share net asset value.
NAV is calculated based on the balance sheet of Tata Motors as at 31st March 2009. As calculated in Table 3 below, NAV of Tata Motors is Rs. 10,081.1 crores.
However, the market value of equity, as on 31st Mar 2009, is Rs. 26,214.44 crores, taking in to account the then trading share price of Rs. 582.76 (Moneycontrol 2010). The reason for this discrepancy in valuation through NAV is discussed in Appendix C. Hence NAV has its disadvantages.
Net Asset Value calculation
NAV = Fixed Assets + Current Assets - Current Liabilities - Long Term Debts
= 14599.31 + 9691.69 - 8958.25 - 5251.65
= 10081.1 crores
Number of Ordinary Shares = 449,832,659
Value per share @ NAV = Rs. 224.11
Table 3: NAV Calculation (Source: Tata Motors Annual Report 2008-2009)
From the above Table 3, the calculated value of the share price is Rs. 224.11 which is much lesser than the actual share price of Rs. 582.76. Hence, the NAV approach would undervalue the company.
Price-to-Earnings multiple (P/E ratio)
A P/E ratio measures the price that the market attaches to each £1 of company earnings, and thus is a sort of payback period. The ratio is a measure of market confidence in the future of the business concerned. A higher P/E ratio indicates greater confidence in the future earning power of the business and hence more investors are prepared to pay in relation to the earnings stream of the business (Atrill and McLaney 2008, p.212-213).
The P/E ratio of Tata Motors is calculated in the below Table 4. There are two different factors, without which it is difficult to determine whether P/E ratio of Tata Motors is high:
Company's growth rate
Competitor's performance as well within the same industry
Price-to-Earnings ratio (FY 2008-09)
Profit after Tax = Rs. 1001.26 crores
No. Of Ordinary Shares = 449,832,659
Earnings per Share = Rs. 22.70
Share price as on 31/3/2009 = Rs. 582.76
P/E Ratio = Market Value per Share / Earnings per Share
= 25.67
Value of Equity derived = P/E ratio * Profit after Tax
= 25.67 * 1001.26
= Rs. 25,702.34 crores
Table 4: P/E ratio calculation of Tata Motors (Source: Annual Report 2008-09 and Moneycontrol 2010)
The equity value derived from P/E ratio is greater than NAV's (Table 4). Figure 6 below highlights the P/E ratios of three different companies and from the graph it is clear that the P/E ratio of Tata Motors is higher than the other two companies' P/E ratio. This suggests that the investors expect higher earnings growth in the future of Tata Motors compared to other two companies that are in the same industry.
Figure 6: P/E ratios of three different companies (Appendix D)
Discounted Cash Flow (DCF)
The value of growing companies depends not simply on the earning power of their existing assets, but also on their growth potential. The purpose of the DCF valuation is to determine the value of a company in terms of its future cash flows. To reach an accurate assessment, it is required to assess total ongoing investment needs and set these against anticipated operating cash flows and revenue. The inflow remaining after net of investment outlay is called "free cash flow" (Pike and Neale 2009, p.297).
Expected Sales Revenue growth
The passenger car and utility vehicle segments have been badly hit due to the collapse of the global financial sector. Three major US carmakers filed for bankruptcy. Worldwide car sales were done by 5% in the year 2008-09. Sales of new cars have declined by 16% in the US, Europe and Japan. In India the passenger car market remained more or less flat in the FY 2008-09. The Company reported sales of 291,993 commercial vehicles in the domestic and international markets, a decline of 17.2% over the last fiscal. With the launch of Tata Nano, the cheapest car, sales should improve for the company in the year 2009-10. Indian automobile industry is expected to see overall sales reaching 12.2 million units in the year 2009-10 compared to 10.1 million vehicle sales in 2008-09. This means an increase of 20% in the overall sales figure (Murthy 2010).
Table 5: Sales Revenue of Tata motors (Annual Report 2008-2009)
Year
Sales Revenue
Sales increase (year on year)
2005
20482.57
NA
2006
24004.12
17.2%
2007
31884.69
32.83%
2008
33093.93
3.8%
2009
28599.27
-13.58%
Cumulative growth rate:
(1+g) ^ n = Rn/Ro
6.9%
Table 6 below calculates the sales revenue forecast for the next 10 years based on growth percentage, which is discussed in detail under Appendix E.
Table 6: Projected 10 years Revenue Growth for Tata Motors (Annual Report 2008-2009 and Appendix E)
Operating Profit Margin - EBIT
The operating profits got lowered in 2008/09 due to the negative growth in volumes along with higher input costs. The company has adopted cost reduction programmes through initiatives like global sourcing, value engineering and vendor rationalization. With this the company aims to increase the operating profit's margin in the long run (Annual Report 2008-2009).
Table 7: Projected operating margin growth rate in % of sales
The Company's operating profit margin declined substantially in the year 2008/09. However, the current scenario has begun to favour the company through softened commodity prices (Indiabulls 2009). Accelerated cost reduction efforts are going to help company reduce the operating costs by a great extent. The company has already announced that it's going to double the production of vehicles. As output increases, operating cost decreases. The company also has its production facilities mainly in India, which is a market with cheap labour. Hence it makes sense to positively visualize the pattern of growth as shown in Table 7 above.
Reinvestments
Capital Expenditure
Capital expenditure of Tata Motors stood at Rs. 5118.13 crores for the year 2008/09. Capital expenditure is analysed with respect to the sales revenue pattern. The Indian passenger and commercial vehicle segments are expected to grow between 12% and 15% CAGR over the next few years (Vasudev 2010). The company's sales revenue is therefore in line with the projected CAGR.
Table 8: Capital Expenditure projected trend in % of sales (Annual Report 2008-2009)
In the year 2008/09, the company borrowed funds from external sources, at high interest rates, to manage its capital expenditure programme. This has badly hurt the company in terms of debt it has been paying. Also, the company has invested in setting up new manufacturing plants in the Indian States of Gujarat and Karnataka. The company is focusing on new launches and considers this as a way of de-leveraging its product portfolio. Hence the company has to wisely plan its capital expenditure as shown in Table 8 above.
Working Capital
Working capital refers to the operating liquidity that is available to the business. For all the years prior to 2008/09, Tata Motors' working capital has increased. The company's working capital declined by 132% in the year 2008/09 compared to that of 2007/08 and the two main reasons for this are: the acquisition of JLR brands and the relocation of a newly setup major manufacturing plant from the Indian State of West Bengal. Since the company has launched Tata Nano and is planning to launch two additional models, the sales are expected to surge. Hence it is fairly reasonable to forecast that even the working capital would increase, alongside the Sales Revenue.
Table 8A: Working Capital projected trend in % of sales
Depreciation/Amortization
Depreciation/Amortization, when expressed as percentage of revenue, is at average of 2.40% for the past five years (Table 9). The year 2008/09 saw an increase in the depreciation figures due to the acquisition of a huge asset, JLR Company. Except for the year 2008/09, depreciation has been less than 3%. Hence it is more likely that the same trend would follow for the next three to four years of the company's business.
Table 9: Depreciation Analysis (Annual Report 2008-2009)
Taxation and Interest
The corporate income tax rate for the year 2008-09 has been 30%, which is the same as in the previous year as well. There has been no change made to the corporate tax (Union Budget 2008). Besides this, surcharge of 10% and education cess of 3% has been imposed on companies. India Inc has been pressurizing the government to reduce the tax rate to 25% but the government gives no positive reply to this request.
The Company's overall borrowing stood at Rs. 13,165 crores at a Debt:Equity ratio of 1.08:1. With this, the net interest cost increased to Rs. 673.68 crores in FY2008-09 from Rs. 282.37 crores in FY2007-08 (Annual Report 2008-2009).
Cost of Equity (Gordon Growth and CAPM Models)
Refer Appendix F
Terminal Value of Firm
Refer Appendix G
Free cash flow and Net Present Value
Free cash flow (FCF) represents the cash that a company is able to generate after laying out (outflow) the money required to maintain or expand its asset base (Investopedia 2010).
For forecasting the FCF and NPV, the capital structure of Tata Motors Ltd is assumed to be the same. Hence the cost of Equity of 17.76% (from Appendix F) is used as the discount factor for NPV calculation.
The cost of equity (Ke) derived from the CAPM model is used because this model provides a usable measure of risk that helps investors get an understanding of the returns they get by putting their money at risk and also it explicitly takes into account the company's level of risk relative to the stock market as a whole. The Gordon growth model best works when the company has been in perpetual growth rate. For Tata Motors, the company's dividend per share declined drastically in the year 2008/09, and thereby reached an all time low. The growth rate, when calculated under this circumstance, is turning out to be negative (Appendix F). This is because GGM considers only the dividend payout policy and does not include the risk factor.
The Free Cash Flow and the Net Present Value of Tata Motors for a 10 year horizon is calculated in the Table under Appendix H.
Below is the gist of the calculated values for Tata Motors:
Net Present Value @ the base year (2009) = Rs. 7,599.6 Crores
Enterprise Value and Value of Equity are calculated through DCF approach:
Enterprise Value = Rs. 79,180.83 Crores
Equity Value = Enterprise Value - Net Debt
= 79180.83 - 29595.11
= Rs. 49,585.12 Crores
Value of Equity from DCF approach = Rs. 49,585.12 Crores
Sensitivity Analysis
Operating Margin (EBIT) + Depreciation/Amortization (DA)
For Tata Motors, the terminal value has been based on EV/EBITDA ratio of 11.9, which is the average of past few years' values (Angel Securities 2010). Since the company is heavily dependent on input materials such as Steel, Copper and Rubber, the EBITDA is highly sensitive to the prices of these goods. Any variation in prices of these materials is bound to have an impact on the overall price of the end product. Also, the EBITDA is reliant on the sales figures of its vehicles overseas. The company expects to get bulk of its revenue generated from Europe, specifically the UK. Hence, even a slight variation in the EV/EBITDA ratio could drastically affect the enterprise value as illustrated below.
If EV/EBITDA is 12.9, the Value of Equity is Rs. 55,499.15 Crores, which is 12.1% greater than the current value at 11.9 (Refer Appendix I).
If EV/EBITDA is 10.9, the Value of Equity is Rs. 43,570.48 Crores, which is 13.8% lesser than the current value at 11.9 (Refer Appendix I).
Hence a small change to the Operating Income Margin will create an impact of larger magnitude on the Enterprise Value.
Cost of Equity - Discount Factor
Discount factor is one entity that can change things upside down for the Company. Beta of Tata Motors is 1.2, which is higher than the market value. Beta has a direct implication on the discount factor that has been used to calculate NPV and eventually Equity value of the company. At present, discount factor of 17.76% is considered.
If Discount factor is 20%, the NPV is Rs. 6,736.4 Crores. The Value of Equity has decreased by 2.1% (Refer Appendix J).
If Discount factor is 10%, the NPV is 10,554.14 Crores. The Value of Equity has increased by 5.95% (Refer Appendix J).
Hence the discount factor plays a major role in determining the equity value of the company.
Conclusion
Different methods have produced different valuation figures as shown below:
Net Asset Value (NAV) = 10,081.1 crores = £1.48 billion
P/E Multiple = Rs. 25,702.34 crores = £3.78 billion
Discounted Cash Flow approach = 49,585.12 crores = £7.29 billion
Table 10: Different types of valuations and their results
Note: Conversion: 1 billion = 100 crores; Currency: 1 GBP = 68 INR (finance.yahoo.com)
Net Asset value approach, though not very accurate, can be used as a reference for valuation of the company. Tata Motor's NAV of Rs. 10,081.1 crores indicates that this is the least value the Company should expect, provided there is no change in the previous year's assets, if it decided to breakup. NAV's approach is not very reliable because it takes in to account the historic cost of the assets while valuating them. Due to the non-availability of information on the current value of the assets, no assumptions could have been made while calculating the current value of assets. This method also ignores the earning potential of the assets.
With the P/E multiple approach, Tata Motors is valued at Rs. 25,702.34 crores. The Company's P/E ratio of 25.67 is higher than that of its competitors. Though the P/E is high, investors cannot fully rely on this value because of unforeseen circumstances that could affect the share price of the company all of a sudden, as it has already happened with Tata Motors in the past. Also, this method is based on Efficient Market hypothesis, which can be unpredictable. Hence the value derived through P/E method may as well be not very credible.
Finally, with the DCF approach, the company is valued at Rs. 49,585.12 crores. The DCF method is based on the company's earning potential and the growth prospects. Comparing the value obtained from DCF with those obtained from the other two methods, it can be accepted that the future cash flows are reliable but the overall projection can be either too high or too low. DCF calculates future cash flows and discounts it at a rate that is considered to be the risk on the investment and finally arrives at the overall intrinsic value of the asset.
After having evaluated three different methods, the value of Tata Motors is Rs. 49,585.12 crores (£7.29 billion). This equity when translated, gives the market price of Rs. 1102.30 per share, which does not reflect the company's actual earning potential. Tata Motors Limited has aggressive plans for the emerging economies and also aims to become an international auto company. For this reason, Tata Motors Chairman, Mr. Ratan Tata, recently appointed a non-Indian, who has international exposure and experience, as the boss of the company (CBC News 2010). Hence, the company aspires to grow bigger as it has the potential to.
Appendix A - Total Shareholder Return (TSR) Calculation
Note: All the figures are in Indian Rupees. Opening and Closing Share prices are taken as on 1st of April and 31st of March for all the years.
TATA Motors Ltd
2004/05
2005/06
2006/07
2007/08
2008/09
Opening Share Price
453.54
357.85
875.84
654.31
585.14
Closing Share Price
386.93
871.73
680.25
582.76
180.30
Difference in Share Price
-66.61
513.88
-195.59
-71.55
-404.84
Dividend paid per share
12.5
13
15
15
6
TSR
-54.11
526.88
-180.6
-56.55
-398.84
TSR as percentage
-11.9%
147.23%
-20.62%
-8.64%
-68.16%
Ashok Leyland
Opening Share Price
25.69
21.10
40.70
37.80
35.80
Closing Share Price
21.00
40.25
38.45
35.30
18.10
Difference in Share Price
-4.69
19.15
-2.25
-2.50
-17.70
Dividend paid per share
1.00
1.20
1.50
1.50
1.00
TSR
-3.69
20.35
-0.75
-1.00
-16.70
TSR as percentage
-14.36%
96.44%
-1.84%
-2.64%
-46.64%
Maruti Suzuki India Ltd
Opening Share Price
496.00
425.00
879.85
800.00
829.00
Closing Share Price
420.80
874..35
819.70
829.55
775.10
Difference in Share Price
-75.20
449.35
-60.15
-29.55
-53.90
Dividend paid per share
2.00
3.50
4.50
5.00
3.50
TSR
-73.20
452.85
-55.65
-24.55
-50.4
TSR as percentage
-14.75%
106.55%
-6.32%
-3.06%
-6.07%
Source: Tata Motors Annual Report (2009), Ashok Leyland Annual Report (2009), Maruti Suzuki India Ltd Annual Report (2009), Google Finance (2010), Moneycontrol (2010).
Appendix B - Economic Value Added
Tata Motors
2005
2006
2007
2008
2009
Profit After Tax
1236.95
1528.88
1913.46
2028.92
1001.26
Equity
4093.23
5522.95
6859.66
7833.45
12228.13
cost of equity
17.76%
17.76%
17.76%
17.76%
17.76%
EVA
509.99
548.00
695.18
637.69
-1170.46
Appendix C - Net Asset Value (NAV)
Tata Motors
As at 31/03/2008
(Rs. in crores)
As at 31/03/2009 (Rs. in crores)
Fixed Assets
10,452.27
14,599.31
Current Assets
10360.25
9691.69
Current Liability
8643.67
8958.25
Long-Term Liability
2461.99
5251.65
NAV
9,706.86
10,081.1
Source: Tata Motors Annual Report 2008-2009
The market value of the company might differ from the book value because of the following reasons:
The book value of the asset is based on the historical cost less depreciation, which doesn't take in to account the inflation. Whereas the market value is influenced by inflation.
Assets can become obsolete even before they get depreciated fully.
It can understate the value of intangible assets such as goodwill or copyrights
Assumptions for adjusting book value to reflect replacement cost
Factors
Reasons for Adjustment
Property Value
Fixed assets of Tata Motors are stated at cost of acquisition or construction less accumulated depreciation / amortisation. This means the company uses historical cost model for its assets. Depreciation is provided on Straight Line Method (SLM).
Plant and Equipment
Plant and equipment in the balance sheet are also based on historical cost less depreciation.
Intangible assets
Intangible assets in balance sheet represent goodwill of the company. Also, the other intangible assets such as product development and innovation are included under Fixed Assets. These assets can be adjusted according to their economic life.
Trade and other receivables
Trade and other receivables are have been adjusted as per previous year's report.
Appendix D - Price-to-Earnings ratio calculation
P/E Calculation
Market price as on 31/03/2009
Earnings per share
P/E Ratio
TATA Motors
582.76
22.70
25.67
Ashok Leyland
18.10
1.43
12.65
Maruti Suzuki
775.10
42.18
18.37
Appendix E - Sales Revenue forecast basis
Tata Motors, like other automotive firms, has succumbed to the global slowdown and hence has witnessed bad growth in terms of sales in the year 2008-09. The year 2010 is considered to be a year of recovery for Tata Motors Limited's standalone business due to overall positive outlook in economic parameters. Despite the slowdown, Indian automobile market has remained fairly stagnant & this will inspire manufacturers to focus on launching new products so as to kick-start the sales growth.
In Q2'10, Tata Motors Limited's (TML) net sales increased 12.7% year-on-year to Rs. 79.2 billion primarily on account of volume recovery across all segments. Going forward, the launch of Tata Nano and other new models will maintain the growth rate in the passenger vehicle segment, which grew by 23% in second quarter of financial year 2009/10. The company, which already had 230,000 books of Nano by March 2009, is expected to increase the production of this car from current 50 per day to 200 per day. Another important factor that drives the sale is the raw materials cost. Cheaper the raw materials are, cheaper will be the car. In Q2'10 the raw materials cost, in terms of percentage of net sales declined by 66.1% (Indiabulls 2009). Despite these positive outcomes, the main worry for Tata Motors continues to be the sales of international brands, Jaguar and Land Rover (JLR). JLR's key European and US markets are expected to remain weak for at least the next 8 to 12 months. Though the company's passenger car sales revenue is expected to increase, the firm's revenue will be affected by the poor sales of JLR vehicles (Angel Broking 2010).
Considering the Automobile Industry growth and Tata Motors past growth rates, and the future plans of the company (Annual Report 2008-2009 and Angel Broking 2010), it becomes logical to presume the growth rate of the company to be 9% for the year 2010/11. India's GDP is expected to reach $950 billion in 2010 and $1390 billion in 2016. The projected size of Indian automotive industry in 2016 varies between $122 billion and $159 billion including $35 billion exports. This translates in to a contribution of 10-11% of India's GDP by 2016 (Government of India 2006). Taking the GDP aspect in to consideration, the growth rate is expected to be from 14% to 16% between the years 2012 and 2016. The law of economics states that recession and boom are inevitable. Going by the same hypothesis, the market may start to diminish after 2016. Hence the growth rate between the years 2017 and 2019 will be around 10%.
Appendix F - Cost of Equity
Gordon Growth Model
2004
2005
2006
2007
2008
2009
Dividends Paid
8
12.50
13.00
15.00
15.00
6.00
Percentage change in dividends
56.25%
4%
15.4%
0%
-60%
The growth can be found out from the formula:
(1+g)^n = (Dn/Do)
Therefore for the last 5 years,
(1+g) power of 5 = (D5/D0) = (6/12.5) = 0.48
"g" = 5th root (0.48) -1
Therefore, g = -13.65%
= 0.86-1 = -0.1365
Cost of equity is [Ke] = [(D0 (1+g)/MV (Ex div)) + (g)]
Do (DPS for the Base Year - 2009) = Rs. 6.00
Growth rate (g) = -13.65 %
D1 = 6 * 0.8635
= 5.81
MV (Share Price for TATA Motors as on 31st March 2009) = Rs. 582.76
MV (EX div) = 582.76 - 5.81 = 576.95
Cost of Equity, Ke = (5.81 /576.95) + (-0.1365)
Ke = -12.64%
CAPM Model
Risk free rate = 6.96% (Reserve Bank of India 2010)
Beta for 2009 = 1.2 (Business Standard 2010)
Equity risk premium= 9% (Damodaran 2010)
Cost of Equity Ke = RF + β (ERP)
Ke = 6.96 + 1.2(9)
Ke = 17.76%
Beta
1.20
1.15
1.10
1.10
1.05
1.05
1.00
0.95
0.90
0.95
Cost of equity (%)
17.76
17.31
16.86
16.86
16.41
16.41
15.96
15.51
15.06
15.51
Appendix G - Terminal Value
Terminal value indicates the value of an investment at the end of the period, taking in to account a specified rate of interest.
Final Year Cash flow * (1+Long term cash flow growth rate)
The terminal value = ----------------------------------------------------------------------------------
(Discount rate -Long term cash flow growth rate)
The terminal value depends on the long-term cash flow growth rate of the company, after the ten year period, which is starting from FY2008-09. Tata Motors has completed the acquisition of Jaguar and Land Rover brands and the company has taken serious steps to improve the sales of these brands in the Europe. On the other hand the company is focusing on launching new models for the Indian market. This means the company's source of revenue would be from two economically different markets. Hence, the Europe's & India's economic growth rates would be distinct.
Hence the EV/EBITDA of 11.9 (average of past few years') has been taken for calculating the terminal value (Angel Securities 2010)
Therefore, the Terminal Value of Tata Motors as on FY2018-19 is:
= EBITDA * 11.9
= (Operating Margin + Depreciation/Amortization)*11.9
= (24877.6 + 5970.62)*11.9 (Operating Margin is from Table 7; Depreciation average is 2.40%)
= 367,093.818 Crores
Note: Operating Margin and Depreciation/Amortization are considered from the projected growth of the company from Tables 7 and 9 respectively
Present value (PV) of the terminal value = Terminal Value discounted to Year 2009 (Base Year)
= 367093.81* ((1)/ (1.1776) ^10)
= 71,581.22 Crores
This value is then added to the PV of free cash flows in the projection period to arrive at an implied Enterprise Value (EV). From the EV, Net Debt is subtracted to finally get the Value of Equity.
Note: The cost of equity, Ke, from CAPM has been used as the discount rate.
Appendix H - NPV and Discounted Cash Flow projection
Free cash flow = [revenues - operating costs] - [interest payments] - [taxes] + [depreciation] - [investment expenditure]
Enterprise Value = [PV of cash during the 10th year] + [PV of terminal value]
Net Debt = [Secured & Unsecured Loans] - [Investments] - [Cash & bank balances]
Equity Value = Enterprise Value - Net Debt
Time Period:
Tata Motors has long-term plans of tapping the small car segment of Indian market and also vows to capitalize on the existing brand image of JLR in Europe. The company, which has already produced the world's cheapest car, certainly has the first mover competitive advantage. In UK, the market for JLR vehicles has declined due to recession. Recession may not last forever and hence the company can expect positive results in the nearby future. Besides this, meanwhile, the losses incurred in the European markets can be compensated by sales in emerging markets. Hence, a fair assumption that Tata Motors has the required competitive advantage to continue its growth for the next 10 years has been made. The year for the future cash flow for 10 years is 2009. It is shown in the below table:
Appendix I - Sensitivity Analysis: EV/EBITDA value
A] If EV/EBITDA is 12.9,
The Terminal Value of Tata Motors as on FY2018-19 is:
= EBITDA * 12.9
= (Operating Margin + Depreciation/Amortization)*12.9
= (24877.6 + 5970.62) * 12.9
= 397,420.04 Crores
Present value (PV) of the terminal value = Terminal Value discounted to Year 2009 (Base Year)
= 397420.04* ((1)/ (1.1776) ^10)
= 77,494.66 Crores
Enterprise Value = 77494.66 + 7599.6 = Rs. 85,094.26 Crores
Therefore, Equity Value = Enterprise Value - Debt
= 85094.26 - 29595.11 Crores
Equity Value = 55,499.15 Crores
B] If EV/EBITDA is 10.9,
The Terminal Value of Tata Motors as on FY2018-19 is:
= EBITDA * 10.9
= (Operating Margin + Depreciation/Amortization)*10.9
= (24877.6 + 5970.62) * 10.9
= 336,245.60 Crores
Present value (PV) of the terminal value = Terminal Value discounted to Year 2009 (Base Year)
= 336245.60* ((1)/ (1.1776) ^10)
= 65,565.99 Crores
Enterprise Value = 65565.99 + 7599.6 = Rs. 73,165.59 Crores
Therefore, Equity Value = Enterprise Value - Debt
= 73165.59 - 29595.11 Crores
Equity Value = 43,570.48 Crores
Appendix J - Change in Discount Factor
A] If Discount factor is 20%, Equity value is calculated in below table:
B] If Discount factor is 10%, Equity value is calculated in below table:
