Tata Motors

“We are happy to present the People’s Car to India and we hope it

brings the joy, pride and utility of owning a car to many families who

need personal mobility.”

– Ratan N. Tata

The event took place at the 9th Auto Expo in New Delhi on 10th January 2008, when Mr. Ratan N

Tata, Chairman of Tata Motors, unveiled the ‘People’s car’. This car, the cheapest car in the world,

is named NANO, the ‘People’s Car’. This car is equipped well with interior upholstery and is a

comfortable, safe, and an all-weather-car, high on fuel efficiency and low on emissions. When

launched, the car will be available in both standard and deluxe versions. Both versions come in a

wide range of body colors and other accessories so that the car can be customized to an

individual’s preferences. It will be launched in the latter half of 2008 and produced from Singur

plant, which is to incur a cost upto Rs.20,000 million. Initially, the production capacity is to roll

out 250,000 units and later on increase it to 350,000 units. It is expected that the demand may rise

to 1 million units and then dealers or satellite units may assemble the cars.

This car is designed keeping a small family in mind; it has a roomy passenger compartment with

generous leg space and headroom. It can comfortably seat four persons. Four doors with high

seating position make ingress and egress easy. With a length of 3.1 meters, width of 1.5 meters

and height of 1.6 meters, with adequate ground clearance, it can effortlessly manoeuvre on busy

roads in cities as also in rural areas. Its mono-volume design, with wheels at the corners and the

power train at the rear, enables it to uniquely combine both space and maneuverability, which will

set a new benchmark among small cars. Nano’s safety performance and its tailpipe emission

performance exceed the current regulatory requirements. In terms of overall pollutants, it has a

lower pollution level than the two-wheelers manufactured in India today.

Indian Automobile Industry

In India there is one car for every hundred people while in China there are 8.2 cars for every

hundred people. It is expected that Indian Automobile Industry will graduate to mass motorization

status by 2014.

The first ever car in India has rolled out in Bombay (Now Mumbai) in the year 1898; the Indian

Automobile Industry has since come a long way. Initially, the Government did not treat this

industry as justifiable and policies were also not favorable for the industry. Later on, the

Government has adopted liberalized policy and given various tax reliefs.

Presently, the size of Indian automobile industry is worth approximately $40 billion; and the

Government of India has worked to make an investment of $40 billion in this sector in the next 10

years. On 29th January 2007, Dr. Manmohan Singh, Prime Minister of India, has announced an

Auto Mission Plan (AMP 2006-16) to develop and design a manufacturing and exports hub to

raise the turnover to $145 billion by 2016 in this sector. Indian automobile sector is the second

largest two-wheeler market as well as tractor manufacturer in the world. It is the fourth largest

commercial vehicle and passenger vehicle market and eleventh largest passenger car market in

the world. It is the world’s largest three wheeler market. Indian Automobile Industry, growing at

18% approximately, is fast becoming a hot destination for global auto players. A well-developed

transportation system plays a key role in the development of an economy. Indian transportation

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system is growing steadily; also, the Automobile industry is moving northwards day by day.

Indian Automobile Industry is entirely capable to meet the needs of all segments of vehicles,

which can be divided into four segments. The figure 1 gives a rough sketch of the Industry Value

Chain and its linkage with various activities leading to the final product.

Figure 1

Source: Icfai Research Team.

Organized and Unorganized

Automobile industry is a capital-intensive industry; hence, it is 100% organized in nature.

However, auto-components industry is largely unorganized with the exception of a few big players

or segments like steering. Major companies in auto component segment are Bharat Forge, Amtek

Auto, Sona Koyo, Ric Auto and many more others.

Segments

i. Two Wheelers: The two-wheeler segment is divided into three sub-segments viz.,

motorcycles, scooters, and mopeds. These can be further sub-divided as per their engine

capacity. It is a highly organized segment with Hero Honda, TVS Motors, and Bajaj Auto

controlling 93% of the market. In FY 07 there was a growth of 11.42% in this segment.

Motorcycles contributed 12.79%, scooters 3.48%, and mopeds 6.95% growth in FY 07. In

the last five years, the growth rate in two-wheeler segment was 16%; due to inflation and

subsequent tightening of monetary policies, it reduced to the current growth rate of

11%-12%. Increase in interest rates in FY 08 also affected the sales in this sector, as 60% of

the two-wheeler purchases are bank-financed.

The two-wheeler market is very competitive where technology and pricing are the two key

determinants to gain larger market presence. As motorcycle is the biggest segment in the

two-wheeler space we would focus more on this segment.

ii. Three Wheelers: The three-wheeler industry is divided into passenger and goods segment.

Passenger segment contributes around 59% the total three wheeler markets. In this market,

Bajaj motor has the market share of 55% compared to 32% of Piaggio whereas in goods

segment major players are Bajaj, Piaggio and M&M where they have 84% of total market

share. Piaggio leads in goods segment with 41% market share whereas Bajaj motors and

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M&M have 25% and 18% market share respectively. Some small players like Atul Auto

Limited, Scooters India Ltd., and Force Motors Limited constitutes 16% of total market

share. In three wheeler segment the competition is mainly among Bajaj Auto Limited,

Piaggio Vehicles Private Limited and M&M. Sale of three wheelers has increased from

359920 in 2005-06 to 403909 units in 2006-07 mainly because of replacement demand due to

statutory mandate to convert to clean fuel vehicles beside this infrastructure development and

spurt in export by about 87% also increased the sales.

iii. Passenger Vehicles and Utility Vehicles: India is the second biggest small car market in the

world after Japan and the 11th largest passenger carmaker in the world. This segment is

broadly divided into (a) Passenger Car, (b) Multi Purpose Vehicles (MPV), and

(c) Utility Vehicle (UV). Passenger car is divided in various segments according to the

specification, which is mainly considered from dimension and passenger or weight carrying

capacity. In A1 segment (length up to 3400 mm) Maruti Udyog Limited is the only player,

sold 79245 cars in FY 07. Tata’s most awaited launch of Rs.100,000 car is expected to give a

hard challenge to A1 segment from 2008. Maruti, Hyundai and Tata cars mainly dominate

the A2 segment (compact car; 3401-4000 mm). This segment itself occupies almost 60% of

the total car market whereas A3 (4001-4500 mm) contributes almost 15-17% of the market.

Competition in A3 segment is quite stiff compared to A2, with eight players in the market.

Global OEM like Maruti Suzuki, GM, Hyundai, Ford, and Honda are the main operators in

this segment. In Executive (A4) segment (4501-4700 mm), the players were able to sell

almost 41,000 cars in FY 07. Main competition in A4 segment is among Honda (whose

market share is almost 40%), Skoda and Toyota.

Utility Vehicles and Multi Purpose Vehicles have shown outstanding performances in 2007,

registering growth rates of 13% and 25% respectively. It is a highly organized market with

major players like Tata Motors, Toyota, Mahindra & Mahindra, Maruti, and General Motors

having a market share of around 82%.

The key drivers behind the robust growth of UVs and MPVs are: the all-new Honda CRV

and Chevrolet SRV launch; increased spend on R&D; and maintenance of EMIs by

increasing the loan tenure, despite the interest rate hike. Lower base is another reason that

contributed to the growth.

iv. Commercial Vehicles: India is the fifth largest commercial vehicles producer in the world.

In FY 07 it grew by 33% wherein Light Commercial Vehicles (LCV) grew at 33.93%. This

segment is categorized by weight carrying capacity. In FY 07 up to 3.5 tons category Tata

and Mahindra & Mahindra (M&M) contributed 97% of the market. In Medium Commercial

Vehicle (MCV #3.5-7 tons category) Tata is the market leader with market share of 67%.

Eicher Motors (EM), Hindustan Motors (HM) and M&M shares almost 31% market share in

FY 07. But in Heavy Commercial Vehicles (HCV# 7.5-12 tons category) competition is

mainly concentrated between Tata and EM. Tata in 12-16.2 tons segment holds 77% of total

market share. Ashok Leyland (AL) and Tata compete in 16.2-25 tons segment. In trailer

(25 + tons) segment Tata leads with 83% of market share. The main factors that led the

growth in CVs at 33% in FY 07 were: Supreme Court’s ban on overloading of trucks,

government’s emphasis on infrastructure, and the ongoing Golden Quadrilateral project.

At present, the automobile companies, like: Tata Motors, Ashok Leyland, Eicher Motors and

Swaraj Mazda dominate Heavy Commercial Vehicles (HCVs) market. Tata Motors has about

60% market share in commercial vehicles sector. With options ranging from Tata LPT 1613,

Tata Se 1613, Tata LPT 2213, Tata LPT 2516 TC, Tata SK 1613, it has many forms and

designs of HCVs to choose from. The company in a technical tie-up with Volvo, one of the

globally acclaimed commercial automobile manufacturers, has launched Volvo FH12-420

and Volvo FH12-340 in India. Rapid infrastructure development with more roads being

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constructed and more industries being set up, the demand for heavy commercial vehicles is

likely to grow at a very fast pace. Rapid urbanization of various cities in the country has led

to an increase in the demand for HCVs. It is believed that auto financiers have also played a

commendable role in the rapid growth of domestic sale of the HCVs. Heavy commercial

vehicle statistics suggest that the export of these vehicles have also grown considerably in

recent years. As a result, various HCV manufacturers are now eying to tap the overseas

market to enhance their business.

The demand for Light Commercial Vehicles (LCVs) has been increasing at a steady pace,

reporting a CAGR of 28.9% between 2001-02 and 2006-07. Two major factors drive this

demand: one, increasing consumption of consumer goods and durables in the smaller cities

and towns; and two, restriction on the movement of large goods carriers in the cities,

especially during daytime. The demand for better load distribution in cities, better fuel

economy and ability to travel on highways and expressways (because of the stability

offered by four wheels) have led to strong demand for LCVs despite being priced higher

than three-wheelers.

In the LCV segment, the continuing success of ‘207 DI/307 DI’, and its variants and the

recent success of ‘Tata ACE’ in the high growth sub-four ton category, have improved Tata

Motors’ market share to an estimated 59 percent in 2005-06 (refer to FY April 1 to March 31)

from 43 percent in 2002-03.

The automobile industry has deep forward and backward linkages with the economy and

stands to benefit from the economic growth. Rising income levels, higher replacement

demand, ban on overloading of trucks, rising infrastructure spending, strong freight rates,

increase in industrial activity, and launch of new models would drive the demand for

automobiles in India. Against this backdrop, the automobile sector is expected to grow at a

CAGR of 12-15% over the next 3-4 years.

However, slow down in construction activity, adverse liquidity position, upward movement

in consumer interest rates and increase in fuel and input material prices, remain a cause of

concern and would adversely impact industry sales. Further, growing interest rates and

tightening of liquidity would deteriorate this position.

Tata Motors

Tata group has the distinction of contributing to every sector of the Indian economy, right from

agriculture to automobiles to aviation to name a few. Tata Motors is one of its successful

companies under Automobiles segment. Tata Motors is the largest automobiles company in

India. The company was established in the year 1945, i.e., two years prior to India’s

independence. The company produced its first commercial vehicle in the year 1954 in

collaboration with M/s Daimler Benz, a German company. It began its own production in the

year 1954; since then, more than four million vehicles rolled out under its name in the Indian

market. It is also the world’s fifth largest medium and heavy truck manufacturer, and the second

largest heavy bus body manufacturer. Tata Motors supplies cars, buses and trucks to several

countries in Europe, Africa, Middle East, South Asia, South East Asia and South America.

Tata Motors has close association with Indian Armed Forces since 1958. The company has

supplied more than 1,00,000 vehicles to Indian military and paramilitary forces so far. Tata

Motors’ defense solutions cover the complete range of logistics and tactical vehicles. The

company has the rare distinction of providing customized solutions for specific defense

applications.

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Tata Motors and Fiat Auto have formed an industrial joint venture in India to manufacture

passenger cars, engines, and transmissions for the Indian and overseas markets. Tata Motors also

has an agreement with Fiat Auto to build a pick-up vehicle unit at Córdoba, Argentina. The

company already distributes Fiat brand cars in India.

Tata Motors international footprint includes Tata Daewoo Commercial Vehicle Co. Limited in

South Korea; a 21% stake in Hispano Carrocera, a bus and coach manufacturer of Spain; a joint

venture with Marco Polo, the Brazil-based bus body builder and coach manufacturer; and a joint

venture with Thonburi Automotive Assembly Plant Company of Thailand to manufacture and

market pick-up vehicles in Thailand. Tata Motors has research centers in India, the UK, and in its

subsidiary and associate companies in South Korea and Spain.

Domestics

Since inception, Tata Motors operates as an automobile industry producing vehicles in the Commercial Vehicle segment that include Heavy and Light Commercial Vehicles. The company started manufacturing Utility Vehicles and Passenger since 1994 and 1999 respectively.

Table 1

No. of Vehicles 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 (9 M)

A. Commercial Vehicle (Industry) 190,682 260,114 318,430 351,041 467,882 380,214

(a) Commercial Vehicle (Company) 107,442 152,195 189,993 214,836 298,586 215,530

Share of Company in Commercial

Vehicle Segment (%)

56.35% 58.51% 59.67% 61.20% 63.82% 56.69%

(A) (i) M & HCV (Industry) 115,711 161,395 198,506 207,472 275,600 200,455

(A) (ii) LCV (Industry) 74,971 98,719 119,924 143569 192,282 179,759

(a) (i) M & HCV (Company) 74,323 90,768 129,245 128,714 173,381 112,871

(a) (ii) LCV (Company) 33,119 49,026 60,749 86,236 125,792 102,659

B. Passenger vehicle Industry 707,198 902,096 1,061,572 1,143,076 1,379,698 1,261,387

(b) Passenger Vehicle (Company) 104,411 140018 179,076 189,070 228,220 151,136

Share of Company in Passenger

Vehicle segment (%)

14.76% 15.52% 16.87% 16.54% 16.54% 11.98%

(B) (i) Cars & Multi purpose vehicles 593,578 755,708 885,212 948,574 1,159,499 1,086,619

(B) (ii) Utility vehicles 113,620 146388 176,360 194502 220,199 174,768

(b) (i) Indica & Indigo 79,525 108,169 144,827 150,951 179,000 120,169

(b) (ii) Utility vehicles 24,886 31,854 34,249 37,905 47,893 30,967

C. Export Industry (A + B) 84,260 146,723 196,342 216,172 248,244 194,546

(c) Export Company (a + b) 8,012 22,046 30,497 50,223 53,474 40,263

Share of Company (%) 9.51% 15.03% 15.53% 23.23% 21.54% 20.70%

Total Company 219,865 314,259 399,566 454,129 580,280 406,929

Total Industry 982,140 1,308,933 1,576,344 1,710,289 2,095,824 1,836,147

Share of Company (%) 22.39% 24.01% 25.35% 26.55% 27.69% 22.16%

Source: Data taken from SIAM and WWW.tataMotors.com.

i. Commercial Vehicles: Tata Motors leads the top five major players (Tata Motors, Ashok Leyland, Eicher Motors, Mahindra & Mahindra and Others) in this segment. The company produces all types of Heavy, Medium and Light Commercial Vehicles (Figure 2). Tata Motors has rolled out over 130 models of light, medium and heavy commercial vehicles ranging from two ton to forty ton, buses ranging from 12-seaters to 60-seaters, tippers, Special Purpose Vehicles (SPVs), off-road vehicles, and defense vehicles. Through Tata Motors, the Tata Group is also contributing for the Defense segment. The company had recorded its CAGR at 19.67% from the year 2002-03 to 2006-07, where the total market capital of the major companies in this segment is Rs.328,580 million crore; and out of this, the company’s market capital is Rs.269,560 million. Also, the company is the market leader in HCV and LCV segment.

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Figure 2

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Tata Motors Ltd. Sales Ashok Leyland Ltd. Sales Eicher Motors Ltd. Sales

Mahindra & Mahindra Ltd. Sales Others

Source: SIAM, Tata Motors.com and CMIE Data Bank and Developed by: Icfai (AW), Finance.

ii. Passenger and Utility Vehicles: In this segment, the Company had launched its first passenger vehicle named Tata Indica in January 1999; and soon after, the portfolio of this segment looked northwards year after year. This car is compatible with all the three fuel types (petrol, diesel and CNG). The company had manufactured the car at various price ranges; it manufactured some varieties on its own while some others in collaboration with other companies. Tata Motors rolled out its one millionth Indica car in the Indian market in its ninth year after it rolled its first Indica car on 24th November 2007.

In the same breath, the company launched the Indigo in 2002 and presently the company has introduced two more models of Indigo, which are successfully running in the market. Middle-income group liked Indigo and it was a hit with this group. Soon, Indigo registered tremendous growth in the market.

iii. Utility Vehicles Segment: In UV segment, Tata Motors launched its first UV Tata Sumo in 1994 followed by Tata Safari in 1998. Variants of these models are also available in the market. In January 2008, the company has introduced The New Sumo – Sumo Granade in passenger vehicles segment with a 2.2-liter Direct Injection Common Rail (DICOR) engine and a longer wheelbase.

The company is ranked second among five major players in this segment (Maruti Suzuki India Ltd., Tata Motors, Hyundi Motors, M&M, and others). See Figure 3.

Figure 3

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Maruti Suzuki India Ltd Tata Motors Hyundai Motor India Ltd. Others Mahindra & Mahindra Ltd.

Source: SIAM, Tata Motors.com, Maruti Suzuki India.com, CMIE Data Bank and

Developed by: Icfai (AW), Finance.

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International

Tata Motors has 21% in the export segment of the automobile Industry; and its vehicles are

exported to Europe, Africa, the Middle East, South and South East Asia, and South America. The

company has joint ventures and franchisee operations in Bangladesh, Ukraine, Kenya, Russia, and

Senegal. Tata Motors is adopting an international strategy to enhance its sales in the global market

with appropriate products in selected segments; this strategy enabled it to achieve a 27.7% growth

in vehicles exports between 2005-06 and 2006-07(see Table 1). The company has plans for the

coming years to boost further growth in exports.

Tata Motors generates its revenue through various modes. It sells its products through its

showrooms established across the country and also globally. All these showrooms provide

maintenance services, servicing of the vehicles to the customers; they also provide for spares parts

of their products, all under one roof so that the customers can get the spare parts easily at one

place. It also extends financial support to its customers through providing vehicle finance at

reasonable rates of interest. Recently, after analyzing the demand for skilled drivers not only in

India but also abroad, the company has opened in February 2008 an Institute of Automotive and

Driving Skill in association with state Government of Punjab, which will help to reduce the some

point of unemployment of our nation.

The company is market leader in Heavy and Light Commercial vehicle segment; also, it is one of

the top three manufacturers of Passenger vehicles. It always plans to ensure that the revenue of the

company moves northwards. The company is always keen to absorb best technology in its range of

products and thereby provide good platform for research and development.

The Company offers a wide range of vehicles in both high price and low price segments.

It recently unveiled Nano (The People’s car), the lowest priced car in the world. With Nano, the

company is capable to fulfill its promise to meet the requirement of people from all classes. Nano

is likely to reduce the market share of two-wheelers by increasing its customer base in the

four-wheeler segment.

Research and Development

i. Tata Motors upgrades its technology on a continuous basis to enhance efficiency and to

increase its revenues; simultaneously, it is also steadily progressing in its program to

transform its entire product range to meet the future needs of evolving global market by

providing contemporary products that offer a strong value proposition to its customers. All

the vehicles as also the engines from its stable are compliant with regulatory norms in India

and the countries to where these vehicles are exported. The company has also developed

Euro IV diesel engines for the European markets.

ii. Tata Motors has also undertaken programs to develop vehicles, which would run on alternate

fuels like CNG, LPG, Bio-diesel, and through using electric traction.

iii. In keeping with the requirement of technological upgradation of Engines development

facility, Tata Motors has added several state-of-the art Test Cells, Testing facilities and other

facilities such as Climatic Chamber, Mileage Accumulation Chassis Dynamometer (MACD),

Sealing Housing Evaporative Emission Detection (SHED) Facility etc., at its Engineering

Research Center.

Tata Motors is ranked second in terms of revenue in the domestic passenger and utility vehicles

segments. Tata Motors also works towards a better society thus fulfilling its Corporate Social

Responsibility; it was awarded with a Golden Peacock Global Award in this regard and has also

received the CII-ITC Sustainability Award, 2006 for its Corporate Governance practices and

Economic and Social performance based on the Triple Bottom Line Concepts as per guidelines of

the Global Reporting Initiative. Under technology absorption, the company filed for 34 patent

applications out of which nine patents were granted to the company.

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a. Contribution in Revenue

i. Strong Sales and Service Network: Tata Motors has strong sales and service network

in the Indian as well as in international market. In the Indian market, the company is

selling seven out of ten medium and heavy commercial vehicles, which is testimony to

the trust in the Tata mark. The company has several firsts to its credit – it brought out

India’s first indigenously developed light commercial vehicle named Tata Ace; India’s

first Sorts Utility Vehicle, Tata Safari; and India’s first indigenously manufactured

passenger car, Tata Indica in 1998, which is India’s largest selling car in its segment.

Table 2 below shows the contribution of Tata Motors to revenue growth in each activity:

Table 2: Contribution to Tata Motors Revenue Growth

Growth in Revenue

{(a)/(b)}*100

(06-07)

(a)

Growth in Revenue

{(b)/(c)}*100

(05-06)

(b)

Growth in Revenue

{(c)/(d)}*100

(04-05)

(c)

(03-04)

(d)

Total Revenue 32.10% 32538.78 18.11% 24632.86 34.98% 20856.32 15451.66

Domestics Vehicle Sales 35.21% 26942.11 11.86% 19925.52 40.04% 17813.38 12719.81

Others 44.00% 787.4385 40.21% 546.8495 24.95% 390.0132 312.12

Selling of Vehicle Parts 22.66% 1226.712 26.52% 1000.094 13.43% 790.4545 696.87

Vehicles Financing 26.16% 553.1593 173.03% 438.4649 50.63% 160.5937 106.62

Exports 14.54% 2782.066 58.44% 2428.8 9.62% 1532.94 1398.38

Dividends & Other Incomes –15.64% 247.2947 73.52% 293.131 -22.46% 168.9362 217.87

Source: Tata Motors.com and developed by: Icfai (AW), Finance.

Yearly Growth in Table 3.

Table 3: Growth in Percentage

(03-04) (04-05) (05-06) (06-07)

9 Months (07-08)

A. Commercial Vehicle (Industry) 36.41 22.42 10.24 33.28 8.35

(a) Commercial Vehicle (Company) 41.65 24.84 13.08 38.98 –3.76

(A) (i) M & HCV (Industry) 39.48 22.99 4.52 32.84 –3.02

(A) (ii) LCV (Industry) 31.68 21.48 19.72 33.93 24.65

(a) (i) M & HCV (Company) 22.13 42.39 –0.41 34.70 –13.20

(a) (ii) LCV (Company) 48.03 23.91 41.95 45.87 8.81

B. Passenger vehicle (Industry) 27.56 17.68 7.68 20.70 21.90

(b) Passenger Vehicle (Company) 34.10 27.89 5.58 20.71 –11.70

(B) (i) Cars & Multipurpose vehicles 27.31 17.14 7.16 22.24 24.95

(B) (ii) Utility vehicles 28.84 20.47 10.29 13.21 5.82

(b) (i) Indica & Indigo 36.02 33.89 4.23 18.58 –10.49

(b) (ii) Utility vehicles 28.00 7.52 10.67 26.35 –13.79

C. Export Industry (A + B) 74.13 33.82 10.10 14.84 4.49

(c) Export Company (a + b) 175.16 38.33 64.68 6.47 0.39

Total Industry (A + B + C) 42.93 27.15 13.66 27.78 –6.50

Total Company (a + b + c) 33.27 20.43 8.50 22.54 16.81

Source: SIAM & Tata Motors.com and Developed by: Icfai (AW), Finance.

Financing Activity: Tata Motor Finance is a subsidiary company of Tata Motors Limited. It

plays a major role to increase the revenue of the company through its financing services. Its

sales increased to 31.4% (2006-07) from 23.8% (2005-06) through its finance wing. This

extensive network of TMF also complements the dealer network of vehicles sales, thus

augmenting the reach of the company.

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Customer Satisfaction: Tata Motors enjoys huge customer satisfaction. Customers who own

commercial and passenger vehicles of the company are quite satisfied with the quality of new

vehicles delivered to them. They opine that the company is moving fast towards meeting

customer expectations like the rest in the automotive industry. But they also feel the company

ought to provide customization in standard features, which could be an area of great

opportunity in future. They also opine that customer handling needs improvement; especially,

during the delivery process, features like warranty and service terms needs to be explained

clearly.

b. Advantages to the Company

Input Costs: Prices of items like steel, non-ferrous metal, rubber and engineering plastics

etc., witnessed sharp upward movement, though were partially offset by the cost reduction

initiatives the company pursued. Prices of most materials continue to witness further rise for

the third consecutive year and these could impact the company’s profitability.

The Company is producing two types of passenger vehicles – Indica and Indigo from the

same platform, which activity of the company reduces the input cost for the products. Tata

group is highly diversified and very huge; therefore, most of the components and other

machinery required for the production of its vehicles are manufactured and produced in

house, which is a very high value addition source for this group.

The FY 2008-09 was not very good for the economy, industry and hence for the company; at

every step declining revenues were recorded. It is seen that the sales of all types of vehicles

in the whole of automobile industry recorded a decline; sales of Tata Motors, were down by

4.34% as recorded on monthly sales basis during the financial year 2006-07. Every part

governing the growth had given negative relation such as hike in interest rate, competition

among the players and supplier of raw materials, and input cost of all types of raw material

touching the roof. The vehicles in all segments are mainly dependent on bank loans. Interest

rates on vehicle loans are usually higher than the other types of loan. In this year, the interest

rate was high and therefore it has affected vehicle sales and resulted in a (4.34%) decline in

the sales as compared to previous year. The company has competition in the Indian market as

well as in the global market; in this competitive scenario, the company has still maintained its

position as the second largest player in the Indian market with 16.5% market share. Also,

competitive activity has increased in all segments in the Indian market with the entry of new

foreign players as well as expansion plans of the existing domestic and foreign

manufacturers. Prices of most of the materials used in the manufacture of the vehicles are

recorded moving northward for the last three consecutive years. This will naturally increase

the production costs.

Future Prospects of the Industry and the Company: An Outlook

Automotive industry is moving upward rapidly in the country and in Asian regions, principally

due to a saturation of the automotive industry in the western world. Indian automobile industry is

playing a major role in Asian Automobiles markets along with the ASEAN (Association of South-

East Asian Nations) countries and China. Various departments analyzed the growth rate of our

economy and have forecast a growth in the economy in future at the rate of 8% to 10%. This

industry will also move parallell to the economy, as there is spiraling demand from domestic and

international markets. This sector is emerging as one of the fastest growing manufacturing sectors

in India and globally.

Some major points that make this sector as an emerging sector are as follows:

• There is potential for much higher growth in the domestic market due to the fact that the

current car penetration level in India 8 to 10 cars per thousand persons. Rise in the

purchasing power of about 300 million people at the top level in our country, where per

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capita income is over $1000, implies that passenger car growth in the domestic market is on

the verge of a major and sustained boom. It is expected that the passenger car market, which

was one million in 2003-04, can easily cross the 3 million mark by 2015.

• Low cost vehicles are driving the growth of automotive industry in emerging economies like

India & China. It offers immense opportunities for global players in these economies.

• Asian countries, such as Thailand, Philippines, Indonesia, and Malaysia are expected to be

the potential markets for automotives due to AFTA (ASEAN Free Trade Area).

• From long-term perspective, cheap financing and price discounts, rising income levels, and

infrastructure developments will drive the growth in the majority of the Asian automotive

markets.

• India is emerging as a manufacturing hub for foreign automotive players because all

resources are available at lower cost compared to other developing countries.

Assumptions

i. As per the company’s data report, the company has earned revenue worth 3.5% northward in

the third quarter ending 2007-08 compared to previous years.

ii. This year the company’s sales growth trend is not expected to be as it was in the past. So, we

took the sales growth as 3.5%, 20% and 20% for the years ending 2007-08, 2008-09, and

2009-10 respectively.

iii. All Direct or Indirect Expenses were in a trend line for the last five years; hence, the

expectation has been made in same trend line.

iv. The tax rate applicable to the company is 30%.

v. Depreciation was taken as percentages of Gross Assets as this trend line is more justifiable.

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ANNEXURE I

Profit and Loss Account for Tata Motors (Expected)

(in Million)

Particulars Mar. 2002 Mar. 2003 Mar. 2004 Mar. 2005 Mar. 2006 Mar. 2007

Mar. 2008(E)

Mar. 2009(E)

Mar. 2010(E)

Income

Gross Revenue (SALES) 8715.15 10704.20 15311.72 20276.56 23568.37 31118.22 32397.89 38877.46 46652.96

Indirect Taxes (Excise, etc.) 1406.62 1768.42 2292.46 3092.23 3413.71 4457.95 4728.34 5674.01 6808.81

Net Revenue (Sales - Excise) 7308.53 8935.78 13019.26 17184.33 20154.66 26660.27 27669.55 33203.45 39844.15

Expenditure

Raw materials, Stores, etc. 4881.83 5899.69 8578.12 12262.62 14633.02 19879.56 20206.59 24247.89 29097.48

Wages & Salaries 691.64 720.37 882.49 1039.34 1147.17 1367.83 1515.49 1818.59 2182.31

Energy (power & fuel) 184.78 193.51 214.52 237.81 258.51 327.41 356.98 428.38 514.06

Advertising & Marketing Expenses 246.85 397.98 321.73 409.22 498.19 674.54 676.92 812.31 974.77

Distribution Expenses 127.03 140.42 185.47 239.31 335.13 479.04 420.97 505.17 606.19

Others 728.71 822.58 1155.51 1442.90 1721.85 2328.86 2367.54 2841.05 3409.26

Less: Expenses Capitalized 144.63 156.46 144.89 218.13 308.85 577.05 474.69 569.63 683.56

Non-recurring Expenses 109.58 57.42 64.80 46.98 54.45 76.66 80.83 96.99 116.39

Total Expenditure 6825.79 8075.51 11257.75 15460.05 18339.47 24556.85 25150.63 30180.75 36216.90

EBITDA 482.74 860.27 1761.51 1724.28 1815.19 2103.42 2518.92 3022.70 3627.25

Depreciation & Amortization 354.68 362.13 382.60 423.56 524.22 578.70 623.00 686.00 763.00

EBIT 128.06 498.14 1378.91 1300.72 1290.97 1524.72 1895.92 2336.70 2864.25

Financial Charges (incl. lease rent) 426.18 320.61 225.96 228.03 301.65 371.45 450.00 530.00 600.00

Other Income 134.84 150.18 263.35 384.95 607.07 971.61 808.26 969.92 1163.89

Non-recurring Income 159.79 63.24 18.57 50.81 200.51 99.27 99.27 99.27 99.27

Change in Stocks –49.03 119.74 –141.98 144.00 256.91 349.68 313.20 375.84 451.02

EBT –52.52 510.69 1292.89 1652.45 2053.81 2573.83 2666.65 3251.73 3978.43

Tax Provision 1.21 210.58 482.55 415.50 524.93 660.37 799.99 975.52 1193.53

PAT –53.73 300.11 810.34 1236.95 1528.88 1913.46 1866.66 2276.21 2784.90

Appropriation of Profits

Dividends 0.00 144.30 318.25 517.15 567.78 676.39 653.33 796.67 974.72

Retained Earnings –53.73 155.81 492.09 719.80 961.10 1237.07 1213.33 1479.54 1810.19

No. of Shares 31.98 31.98 35.30 36.18 38.29 38.54 38.54 38.54 38.54

EPS 9.38 25.34 35.04 42.26 49.98 48.43 59.06 72.26

DPS 4.51 9.02 14.29 14.83 17.55 16.95 20.67 25.29

Retention Ratio 51.9% 60.7% 58.2% 62.9% 64.7% 65.0% 65.0% 65.0%

Pay-out Ratio 48.1% 39.3% 41.8% 37.1% 35.3% 35.0% 35.0% 35.0%

Tax 41.2% 37.3% 25.1% 25.6% 25.7% 30.0% 30.0% 30.0%

Depreciation 362.13 382.60 423.56 524.22 578.70 623.00 686.00 763.00

No. of Shares 31.98 35.30 36.18 38.29 38.54 38.54 38.54 38.54

EPS 9.38 22.96 34.19 39.93 49.65 48.43 59.06 72.26

DPS 4.51 9.02 14.29 14.83 17.55 16.95 20.67 25.29

Source: SIAM, Tatamotors.

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ANNEXURE II

Balance Sheet of Tata Motors (Expected)

(in Million)

Particulars March 2002

March 2003

March 2004

March 2005

March 2006

March 2007

March 2008(E)

March 2009(E)

March 2010(E)

Gross Assets 5737 5885 5941 6529 7863 8487 8900 9800 10900

Accumulated Depreciation 2399 2680 2957 3353 4252 4570 5193 5879 6642

Capital WIP 141 192 286 539 951 2513 2700 2500 2500

Net Fixed Assets 3478 3398 3270 3715 4562 6431 6407 6421 6758

Investment 1190 1272 3081 2912 2015 2477 2767 3320 3984

Current Assets 2750 3076 3706 7120 9491 10146 11706 14680 17617

Cash 327 245 770 2005 1119 827 1988 2958 3551

Inventories 988 1159 1147 1601 2012 2501 2800 3089 3707

Trade Debtors 840 420 391 515 654 736 830 996 1195

Loan and Advances 596 1252 1397 2998 5705 6083 6087 7637 9164

Current Liabilities 2743 3585 4694 6574 6945 7362 7471 8633 9961

Net Current Asset without Cash -320 -755 -1758 -1460 1427 1957 2247 3089 4105

Deffered Tax (Net) 95 -105 -514 -565 -623 -787 -800 -900 -1000

Capital Employed 4770 4055 4850 6607 8500 10905 13409 14889 17399

Total Assets 7513 7641 9543 13181 15445 18267 20080 23521 27360

Non-Current Liabilities

Secured Debt 1345 1037 943 490 823 2022 2287 2644 2813

Non-Secured Debt 960 421 317 2006 2114 1987 2213 2656 3187

Total Debt 2305 1458 1260 2495 2937 4009 4500 5300 6000

Contigent Liabilities

Share Capital 320 320 353 362 383 385 385 385 385

Reserves 2145 2277 3237 3750 5181 6510 7724 9203 11013

Total Stock Holding Equity 2465 2597 3590 4111 5563 6896 8109 9589 11399

Capital Employed 4770 4055 4850 6607 8500 10905 12609 14889 17399

Total Liabilities 7513 7641 9543 13181 15445 18267 20080 23521 27360

Source: SIAM, Tata Motors.

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ANNEXURE III

Cash Flow of Tata Motors (Expected)

(in Million)

Particuars FY03 FY04 FY05 FY06 FY07 FY08 (E)

FY09 (E)

FY10 (E)

PBT 511 1293 1652 2054 2574 2667 3252 3978

Depreciation 362 383 450 522 583 623 686 763

Interest 267 116 36 115 103 450 530 600

Other Non-Cash Charges 5 37 –46 –155 –107

Operating Profit Before WC Changes 1145 1829 2093 2537 3153 3740 4468 5341

Changes in Current Assets –383 –247 –1591 –2513 –674 –398 –2004 –2344

Changes in Current Liabilities 673 1164 1156 194 222 –122 –1262 –1428

Changes In WC 289 917 –435 –2319 –452 –276 –742 –916

Cash Generated From Operations 1435 2745 1658 217 2701 3464 3725 4425

Direct Taxes Paid –9 0 –407 –439 –490 –800 –976 –1194

Others –50 –26 0 0 0

Net Cash Generated From Operations 1376 2719 1250 –221 2210 2664 2750 3232

Cash Flow from Investing Activities

CAPEX –227 –273 –814 –1109 –2366 –600 –700 –1100

Investments –66 –1855 –311 1112 –688 –290 –553 –664

Interest Received 33 41 47 79 41

Dividend Received 11 45 122 111 208

Net Cash Used In Investing Activities –248 –2043 –956 194 –2805 –890 –1253 –1764

Cash Flow from Financing Activities

Change in Debt –881 –299 1264 –31 1243 491 800 700

Change in Equity 0 683 72 0 0

Dividends Paid 0 –299 –165 –514 –567 –653 –797 –975

Interest Paid –327 –237 –223 –310 –370 –450 –530 –600

Others 0 0 –8 –3 –4

Net Cash used in Financing Activities –1209 –151 940 –858 302 –612 –527 –875

Net Increase in Cash and Cash Equivalents –81 525 1235 –886 –293 1161 970 593

Cash and Cash Equivalents at the Beginning 327 245 770 2005 1119 827 1988 2958

Net Increase in Cash and Cash Equivalents –81 525 1235 –886 –293 1161 970 593

Cash and Cash Equivalents at the End 245 770 2005 1119 827 1988 2958 3551

Source: SIAM, Tatamotors.

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ANNEXURE IV

Table Showing Share Prices of Tatamotors and Sensex (in Million)

BSE 500 Price of Share of Tata Motors at the End of Month(Rs.)

1 November 2004 2,548.36 482.85

2 December 2004 2,779.65 505.15

3 January 2005 2,726.49 504.75

4 February 2005 2,825.65 475.15

5 March 2005 2,734.66 413.95

6 April 2005 2,610.50 411.9

7 May 2005 2,829.20 432.95

8 June 2005 2,928.31 425.05

9 July 2005 3,124.78 480.95

10 August 2005 3,273.00 462.85

11 September 2005 3,521.83 534.45

12 October 2005 3,198.69 473

13 November 2005 3,568.37 555.6

14 December 2005 3,795.96 653

15 January 2006 4,004.96 709.3

16 February 2006 4,130.07 814.35

17 March 2006 4,516.73 932.6

18 April 2006 4,829.73 950.5

19 May 2006 4,157.93 789.7

20 June 2006 4,029.97 794.45

21 July 2006 4,029.43 739.75

22 August 2006 4,423.88 845.15

23 September 2006 4,739.67 862.05

24 October 2006 4,957.37 827.95

25 November 2006 5,227.73 809.4

26 December 2006 5,270.76 900.25

27 January 2007 5,408.71 877.75

28 February 2007 4,938.08 783.95

29 March 2007 4,955.39 727.75

30 April 2007 5,311.03 750.45

31 May 2007 5,646.90 757.5

32 June 2007 5,781.37 669.75

33 July 2007 6,063.20 699.3

34 August 2007 5,950.11 701.85

35 September 2007 6,773.54 778.15

Source: BSE India.

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ANNEXURE V

Various Ratios of the Company

(in Million)

Particulars FY03 FY04 FY05 FY06 FY07

Profitability Ratios

Return on Assets (ROA) 4% 8% 9% 10% 10%

Return on Equity (ROE) 12% 23% 30% 27% 28%

Return on Capital Employed (ROCE) 7% 17% 19% 18% 18%

DuPont Analysis-ROE Decomposition

PAT/PBT (Tax Efficiency) 59% 63% 75% 74% 74%

PBT/EBIT (Interest Burden) 103% 94% 127% 159% 169%

EBIT/Sales (OPM) 5.57% 10.59% 7.57% 6.41% 5.72%

Sales/Total Assets (Asset Turnover) 140% 160% 154% 153% 170%

TA/NW (Financial Leverage) 294% 266% 321% 278% 265%

ROE 14% 27% 35% 32% 32%

Liquidity Ratios

Current Ratio 0.9 0.8 1.1 1.4 1.4

Acid Test Ratio 0.5 0.5 0.8 1.1 1.0

Debt-Equity Ratio 0.562 0.351 0.607 0.528 0.581

Efficiency Ratios

Assets Turnover Ratio 1.4 1.6 1.5 1.5 1.7

Working Capital Turnover Ratio –21.0 –15.5 37.2 9.3 11.2

F.A. Turnover Ratio 3.2 4.7 5.5 5.2 4.8

C.A. Turnover Ratio 3.5 4.1 2.8 2.5 3.1

Debtors Velocity 14.309 9.331 9.269 10.128 8.630

Margin Ratios (%)

EBITDA Margin 9.6% 13.5% 10.0% 9.0% 7.9%

Pre-Tax Margin 5.7% 9.9% 9.6% 10.2% 9.7%

Net Profit Margin 2.8% 5.3% 6.1% 6.5% 6.1%

Growth Ratios YoY(%)

Net Sales 22.8% 43.0% 32.4% 16.2% 32.0%

EBITDA 78% 105% –2% 5% 16%

Adj.PAT 170.0% 52.6% 23.6% 25.2%

Adj.EPS 170.1% 38.3% 20.6% 18.3%

Working Ratios (Days)

Inventory 39.5 27.4 28.8 31.2 29.3

Debtors 14.3 9.3 9.3 10.1 8.6

Net Working Capital Excluding Cash –25.7 –41.9 –26.3 22.1 23.0

Others Ratios (%)

Other Income/PBT 41.8% 21.8% 26.4% 39.3% 41.6%

Adj.EPS 9.4 25.3 35.0 42.3 50.0

CEPS 20.7 33.8 45.9 53.6 64.7

DPS 4.5 9.0 14.3 14.8 17.5

BVPS 81.2 101.7 113.6 145.3 178.9

Cash Per Share 7.7 21.8 55.4 29.2 21.5

Source Icfai Research Team.

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References

1. www.tatamotors.com

2. www.siamindia.com

3. www.businessline.in

4. www.bseindia.com

5. www.moneycontrol.com

6. CMIE database

7. www.ahokleyland.com

8. www.autoindia.com

Model Question Paper

Time: 21

2 Hours Total Points: 80

• This part consists of questions with serial number 1-5.

• Answer all questions.

• Points are indicated against each question.

• Do not spend more than 150 minutes.

Read the following case carefully and answer the following questions.

1. The Indian automobile industry is facing stiff competition with the entry of new players. In this scenario, perform the SWOT analysis of Tata Motors Ltd.

(12 points)

2. a. The various strategies adopted by the company from time to time enabled it to become a major player in the industry. Analyse the various strategies of the company.

b. The unique position enjoyed by the company in the industry has been adding value to the company. In this respect, analyse the value drivers of the company.

(8 + 6 = 14 points)

3. The risk of any individual share can be measured as the volatility of returns of a share relative to the return from the market as a whole. From given data in Annexure IV and using data from November 2004 to January 2006. Compute the risk of the share.

(8 points)

4. The Indian economy is the second fastest growing economy in the world, with the economy growing at over 8 percent per annum. This growth in Indian economy is combined with increased urbanization and consumer awareness to various kinds of luxury goods that has changed the lifestyles of the people. This growth in economy led to a boom in passenger vehicle market and attracted many foreign players to explore huge untapped market in India. Against this backdrop perform Michael Porter analysis of Indian passenger car industry.

(12 points)

5. Ashok Leyland Ltd, Mahindira & Mahindira and Eicher are the major companies in automobile industry. The following information is available with respect to these three companies:

Company Levered Beta Debt/Equity Tax Rate

Ashok Leyland 0.97 1.53 27%

Mah. & Mah. 0.98 1.21 30%

Maruti 0.69 0.46 30%

a. Based on the above data, you are required to calculate the levered Beta of Tata Motor, if Debt/Equity (1.65). Tax rate applicable to the company is 27%.

b. Based on the beta obtained from (a), you are required to calculate the WACC of Tata Motors Ltd. It is observed the G-secs are available in market providing returns to investors at the rate of 7.75% and at same time an investor has observed risk premium from NIFTY can be earned at the rate of 5%. Since the company is a highly rated company, it is enjoying the Cost of debt at the rate of 9.27%.

(8 + 4 = 12 points)

6. Find the value of share of Tata Motors Ltd, using FCFF technique as on 25th March 2008. The free cash flows to firm are expected to grow at 11% p.a. from the FY 11 to 15 and stabilizes at 8/% thereafter.

(22 points)

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Model Question Paper

Suggested Answers

1. A. Strengths

i. Market Leader in the Industry: Tata Motors is leader in the commercial vehicles

segment and is one of the top three players in the passenger segment. The company

produces diverse range of products to cater to the different needs of customers; as a

result, the company has seen constant rise in its sales. In an effort to create new

segments in the market in the last few years, Tata Motors has launched Tata Ace in

2005. It is India’s first mini-truck, which was a huge success. Last year, it

revolutionized world’s passenger car segment with the launch of Nano, the People’s car,

which is the world’s cheapest car.

ii. Wide Network: The Company has a wide network of its show rooms across India to

cater to the different needs of its customers.

iii. Research and Development: The company has a strong research and development

division to develop future technologies for its vehicles. At present the company is

spending around 2 percent of its revenue on R&D. It has six R&D centers across the

world. The company has plans to set up a cutting-edge research and development centre

in the UK. This global R&D hub will serve multiple Tata companies, including Tata

Motors, INCAT, Corus, Tata Chemicals and even Jaguar and Land Rover.

B. Weaknesses

i. Dependence on India: While many of its competitors have aggressively expanded into

overseas markets, Tata Motors has ventured into foreign countries only in the recent

past. In addition, the company is dependent on the Indian market, as nearly 82% of its

sales were generated from India in FY 2007-08.

ii. High Dependence on Macroeconomic Scenario: The industry’s growth is highly

dependent on macroeconomic fundamentals of the economics. Central Bank policies

affect the performance of the industry in the short run. Global fundamentals like change

in oil prices have huge bearing on the industry.

C. Opportunities

i. Infrastructure and Road Development: The ongoing infrastructure and road

development activities are a great boost to the company’s future prospects. The Golden

Quadrilateral road project was 97% complete as on March 31, 2008. The North South

East West (NSEW) road corridors are expected to be completed by December 2009.

Eventually, rural connectivities are also expected to increase. The improved

connectivity will increase the movement of goods and passengers, which will create a

demand for trucks, and passengers. The ongoing infrastructure activities are expected to

increase road transportation of goods, which can create huge demand for trucks.

ii. Increase in Income Levels: A growing middle income class, rise in their average

income levels, moderation in income tax rates, and the recently announced increase in

compensation for government employees, all augur well for the automotive industry,

both in terms of personal transportation requirements as well as freight movement.

iii. Car Penetration in India: Car penetration in India is very low compared to developing

and developed countries. In India, car penetration is at seven cars per 1000 people

compared to Brazil 96, Thailand 51, South Korea 219, Malaysia 253, France 495 and

Germany 550 cars per 1000 people. The reduction in excise duty on ‘Small cars’

announced in the Budget is expected to increase the penetration of cars in the country.

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iv. Changing Lifestyles: Changing lifestyles and increasing demand for better products

has enhanced consumption levels and rapid growth in several areas like passenger cars,

retail chains, cellular phones, and cable and satellite television. The Company, with its

wide portfolio, is expected to benefit from the improvement in lifestyle and higher

aspiration levels in passenger car segment, and also from the potential growth in freight

movement.

D. Threats

i. Infrastructure Bottlenecks: Increasing congestion in cities has attracted government’s

attention towards development of mass transit system like buses and trains. Domestic

passenger vehicle demand could be impacted by the growth of road- and rail-based

mass transit systems. However, the Company would benefit from the road-based mass

transit system due to its wide range of commercial passenger carriers.

ii. Global Competition: India continues to be an attractive destination for the global

automotive players. The global automotive manufacturers present in India have been

expanding their product portfolio and enhancing their production capacities. The

commercial vehicle segment is also expected to see severe competition in future once

Mercedes and Hyundai launch their trucks in India.

iii. Rising Oil Prices: The sky rocketing oil prices are a threat to the automobile industry.

If the same situation continues in future, this will affect the sales of the company.

iv. Rising Input Cost: Prices of commodity items like steel, non-ferrous and precious

metals and rubber witnessed an upward movement, which was partially offset by the

Company’s cost reduction initiatives. The price of steel, in particular, has increased by

30%-35% in the last 24 months and is expected to further increase significantly in the

coming year. Whilst the Company continues to pursue cost reduction initiatives,

increase in price of input materials could have a negative impact on the demand in the

domestic market and/or could severely impact the Company’s profitability to the extent

that the market, through price realization, does not absorb the same.

2. a. The Key Strategy of the Company follows: The company is a leader in Heavy and

Light Commercial vehicle segment and it is one of the top three Passenger vehicle

manufacturers. The company is adopting the following strategies to increase its revenue

and market as well as to be a leader in automobile industry.

Product Range: The Company has a vast product range in both passenger car and

commercial vehicle segments. Last year, i.e. in 2007, it has introduced new versions in

Tata Ace to cater to the rural public transport, which was earlier occupied by three

wheelers. In early 2008, it introduced Tata Nano, the world’s cheapest car; this is

expected to revolutionize the passenger car segment when it is launched.

Technology Absorption

i. To increase its competence, the company continues to upgrade its technology on a

regular basis. Simultaneously, it is steadily progressing with its program to

transform its entire product range to meet the future needs of an evolving global

market. It aims to provide contemporary products that offer a strong value

proposition to its customers. Tata Motors’ vehicles and engines are compliant with

regulatory norms in India as also the countries to which they are exported. The

company has also developed Euro IV diesel engines for the European markets.

ii. Tata Motors has also undertaken programs to develop vehicles, which would run

on alternate fuels like CNG, LPG, Bio-diesel and also electric traction.

iii. In keeping with the requirement of technological up-gradation of Engines

development facility, the company has added several state-of-the art Test Cells,

Testing facilities and other facilities such as Climatic Chamber, Mileage

Accumulation Chassis Dynamometer (MACD), Sealing Housing Evaporative

Emission Detection (SHED) Facility etc at its Engineering Research Center.

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International Strategy: Tata Motors is adopting the strategy to sell appropriate

products in selected segment to grow its sales in the global market. In this direction, it

has entered into a partnership agreement with Fiat to manufacture pick up trucks under

brand name Fiat and will be marketed in central and south America. It is also exploring

possibilities to manufacture and sell its products in Latin America through a partnership

with Fiat and Iveco.

Financing Activity: Tata Motor Finance (TMF), a subsidiary of Tata Motors Limited,

is contributing a major role to increase company revenues through the financing

services. Through the financing activity, the company sales increased to 31.4%

(2006-2007) from 23.8% (2005-06). This extensive network of TMF will also

complement the dealer network of vehicle sales, thus augmenting the company’s reach.

Customer Satisfaction: Customer satisfaction is a key to any business. To enhance

customer satisfaction, it is offering various services to customers in the form of free

service camps; customer education meets, and value added services like value care, gold

club membership, and empower programs etc.

Research and Development: Tata Motors is pursuing research and development

initiatives in product development, environmental technology and vehicle safety areas.

The Company widened the scope of its research and development activity from

in-house product and technology development to managing research and development

processes across various internal and external agencies, including its research and

development centers in Korea, Spain and the United Kingdom. It is planning to open a

new centre in the UK that would integrate all its research activities across different

places in the world. The Company’s research and development initiatives include

developing vehicles running on alternative fuels, including CNG, LPG and bio-diesel

and pursuing alternative fuel options such as ethanol blending and developing vehicles

fuelled by hydrogen.

Mergers and Acquisitions: The company has been expanding both organically and

inorganically to increase its presence across the markets. In the last few years it has

acquired several companies spread across different countries to expand its operations. In

line with this strategy, it has acquired Daewoo Commercial vehicle segment in February

2004; following this, it has acquired a stake in Spanish bus manufacturer Hispano

Canocera S.A. in March 2005. In 2008, it has acquired British iconic brands Jaguar and

Land Rover to enter into top end of the market, where brands have huge significance in

the success of products.

b. The followings are major value drivers for the company, which gave a lot of support to

the company in its growth path:

Input Costs: Prices of commodity items, particularly steel, non-ferrous metal, rubber

and engineering plastics etc. witnessed upward movement, which was partially offset by

the cost reduction initiatives the company pursued. Prices of most of these materials

continue to witness further increase for the third consecutive year, which could impact

the company’s profitability. However, the company is pursuing various cost-cutting

measures to maintain its low cost manufacturing status.

Platform Sharing: The Company producing two types of passenger vehicles – Indica

and Indigo in the same platform; this activity reduces the input cost for the products.

In Source: As this group is very vast, most materials required for the production of

vehicles are being manufactured and produced in-house. This is another value added

source to the company.

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3. The volatility of stock can be measured through beta of the stock, which can be calculated as

follows:

Period BSE 500 Index

CMP of Share (Rs.)

Ret. fm Index = X

(%)

Ret. on Share = Y

(%)

(X – x) (Y – y)

(X – x)^2

November 2004 2,548.36 482.85

December 2004 2,779.65 505.15 9.08 4.62 7.70 31.65

January 2005 2,726.49 504.75 –1.91 –0.08 17.85 28.76

February 2005 2,825.65 475.15 3.64 –5.86 –1.70 0.03

March 2005 2,734.66 413.95 –3.22 –12.88 107.59 44.49

April 2005 2,610.50 411.9 –4.54 –0.50 29.93 63.84

May 2005 2,829.20 432.95 8.38 5.11 9.17 24.28

June 2005 2,928.31 425.05 3.50 –1.82 –0.27 0.00

July 2005 3,124.78 480.95 6.71 13.15 32.27 10.62

August 2005 3,273.00 462.85 4.74 –3.76 –9.07 1.67

September 2005 3,521.83 534.45 7.60 15.47 50.74 17.24

October 2005 3,198.69 473 –9.18 –11.50 186.20 159.40

November 2005 3,568.37 555.6 11.56 17.46 115.23 65.73

December 2005 3,795.96 653 6.38 17.53 41.81 8.57

January 2006 4,004.96 709.3 5.51 8.62 11.04 4.23

Sum 48.24 45.56 598.48 460.53

Mean 3.45 3.25

Covariance of Security with True Market

42.75

Beta 1.30

4. Michael Porter Analysis of Indian passenger car industry.

Threat of Entry: The entry threat barrier for passenger vehicle market is moderate. The

passenger vehicle market is not highly regulated. The regulations are mainly in the form of

emission norms, which are very high due to global climatic concerns. Further, the market is

largely untapped. The Indian passenger car market has a penetration of just 7 cars per 1000

people. However, the industry is highly capital intensive, and requires huge network of

dealers and service centers to provide after–sales services.

Bargaining Power of Suppliers: The bargaining power of suppliers is moderate. The

bargaining power of the ancillary suppliers is low mainly because of the highly unorganized

nature of auto-ancillary industry. Even though more suppliers have joined in the production

of auto grade steel, suppliers control their prices to some extent. Any increase in the price of

raw materials can increase the prices of steel.

Competitive Rivalry: The competitive rivalry is high in the passenger car industry;

especially, it is very high in compact car segment, which is the largest segment in the Indian

passenger car industry. More players are entering to tap this segment. As a result, existing

players are offering incentives to keep up their share. Further, the price difference is very low

in this segment.

However, in the premium segment the competition decreases as one goes up the ladder due to

decreasing number of players.

TMS 2008-10

210

Bargaining Power of Buyers: The bargaining power of buyers is low. Buyers are highly unorganized in this industry. They do not have any bargaining power, except for large fleet owners and government organizations, which have certain degree of bargaining power. The main reason being products are highly standardized.

Threat of Substitute: The threat of substitute is high in this industry mainly because the options of alternative transport like two-wheelers, and public transport like three-wheeler taxis, buses and trains. Even for entrepreneurs, they have a lot of alternative investment opportunities other than automobile industry that give them better returns.

5. a.

Particulars A/L M&M Maruti Tata Motors

Beta 0.97 0.98 0.69

Debt/Equity 1.53 1.21 0.46 1.65

Tax 27% 30% 30% 27%

Unlevered Beta 0.37 0.48 0.88

Average of Unlevered Beta 0.58

Leveraged Beta for Tata Motors 1.64

Unlevered Beta = Beta/[{1 + (1 – t)}*(D/E)]

Required levered beta = (Average of Unlevered Beta) x (D/E of Tata motors) x {1 + (1 – t)}

b. Ke = 5 + 1.64(7.75)

= 17.71%

WACC = 17.71*10905/14914 + 9.27(1 – .27)*4009/14914

= 12.95 + 1.82

= 14.77%.

6.

Particulars FY 07 FY 08 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14 FY 15 Terminal

Value

Total Revenue 277312 285771 342726 411073

Revenue Growth (%) 3.05% 19.93% 19.94%

FCF Margin (%) –1.2% 6.2% 4.9% 4.1%

Tax Rate (%) 25.7% 30.0% 30.0% 30.0%

Capex/Sales 2.34% 1.49% 2.71% 2.76%

SGR 8%

Growth 11% 11% 11% 11% 11%

Revenue( Sales) 266603 276696 332035 398442

EBIT 15247 18959 23367 28643

% of Revenues 5.72% 6.85% 7.04% 7.19%

Depreciation 5787 6230 6860 7630

% of Revenues 2.17% 2.25% 2.07% 1.91%

EBITDA 21034 25189 30227 36273

% of Revenues 7.89% 9.10% 9.10% 9.10%

Less: Cash Tax 3912 5688 7010 8593

NOPLAT 17122 19501 23217 27680

Capex –23660 –5996 –7000 –11000

Changes in WC –4520 –2761 –7423 –9162

Post Tax Non-operating Cash Flows

7961 6353 7484 8842

Free Cash Flows –3097 17096 16278 16360 18159 20157 22374 24835 27567 476357

Total Present Value 320334 17064 14486 12979 12845 12712 12580 12450 12321 212898

Book Value of Debt 40091

Fundamental Value of Equity

280243

No. of Outstanding Shares (million)

385

Fundamental Value of Equity

727.9

Fundamental value of equity as on 25th March 2008 is Rs.727.90.