The Week That Was: Volkswagen, Daimler And Tata Motors

Automotive companies Volkswagen AG (OTCMKTS:VLKAY), Daimler AG and Tata Motors (NYSE:TTM) witnessed declines in share prices this week, even more than that seen in the S&P 500 Index. With new concept models unveiled this week, we turn our focus towards the commercial vehicle businesses of these three automakers. While Volkswagen unveiled its concept pick-up truck model, Daimler introduced what it calls the “truck of the future”. On the other hand, even as Tata Motors’ standalone business continues to reel under disappointing sales in India, improving economic health of the country could provide the much needed boost to the group’s commercial vehicle division in the country.

Below we discuss key events from last week in relation to the automotive companies in discussion.

Volkswagen

While Volkswagen’s passenger vehicle divisions have reported strong volume growth so far this year, strengthening the company’s bid to overthrow Toyota as the world’s largest automaker this year itself, commercial vehicle volumes have declined. Unit sales for Volkswagen’s own branded commercial vehicles, which form under 5% of net volumes (excluding Scania, MAN), fell 4% through August. In a bid to expand into the pickup truck market, Volkswagen introduced its TRISTAR concept model this week, based on its T-series vans. Why this model could be significant for Volkswagen Commercial Vehicles is because the Transporter-inspired TRISTAR uses one of the T-series’ top clean-diesel engines, and if launched in the U.S., could drastically improve a typical pickup fleet’s average fuel economy.

We have a $48.14 price estimate for Volkswagen AG, which is roughly 7% above the current market price. The stock price fell by 6.1% in the last five days. Volkswagen’s stock has declined by almost 20% in the last three months, partly hurt by fines imposed in China on alleged monopolistic practices.

See Our Complete Analysis For Volkswagen AG

When Volkswagen increased its stake in Scania to over 98% in May, it planned to integrate its three truck businesses- Scania, MAN and Volkswagen trucks, and put them on a common manufacturing platform, resulting in cost benefits of up to 650 million euros ($890 million) annually. Scania and MAN together form around 4% of Volkswagen’s valuation, and the company announced this week that the two brands will cooperate on gearboxes in the coming future. ^[1] Collaborating on vehicle components will allow the group to remove duplicate development and innovation costs, exchange technical know-how, and consequently improve profitability. We presently expect margins for Scania and MAN to remain relatively flat at under 10% through 2021. However, if margins expand to 15%, there could be as much as a 10% upside to our current price estimate for the company.

Daimler

Unfavorable economic conditions in Europe and some emerging countries have dragged down sales of commercial vehicles for Daimler. But as economic conditions improve in India, the automaker announced this week that it aims to almost double its market share to over 10% in the country in the next five years. Commercial vehicle sales in India stood at 2,37,423 units between April-August, down 13.6% year-over-year. But commercial vehicle volumes could soon pick-up in the country, as economic conditions improve. India’s GDP growth rate in the last quarter was 5.7%, the highest in the last couple of years. With increase in infrastructural investments and a pickup in housing activity, commercial vehicle sales in the overall market and for Daimler could rise.

We have a $87.12 price estimate for Daimler AG, which is roughly 12% above the current market price. The stock fell 5.8% in the last five days.

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Assuming that Daimler achieves the 10% market share target in India, and the country’s commercial vehicle market grows at a modest rate through the next five years, the automaker could sell nearly 70,000 units annually in the country by then, up from 6,500 last year. Another major boost for the Daimler International Trucks and Buses division, which forms almost a fifth of the company’s valuation by our estimates, was the unveiling of the self-driving Mercedes-Benz concept truck. Daimler expects self-driving trucks to be the future of trucks and expects this technology to be on roads in ten years.

Tata Motors

While Tata’s luxury vehicle division Jaguar Land Rover continues to drive growth in the company’s profits, the standalone unit has struggled. This is because Tata branded vehicles mainly sell in India, and with vehicle sales remaining low in the country due to a weak economic environment, Tata’s volumes also fell. But with a stable government at the centre, higher investments in the housing and infrastructure sectors, reduced excise duty and positive consumer sentiment, vehicle sales are expected to improve. A rise in commercial vehicle demand could be a huge boost for Tata, as the company dominates this segment with over half the industry volumes.

Trefis price estimate for Tata Motors is $47.36, which is around 7% above the current market price. The stock price fell by 8.4% in the last five days.

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Although a possible rise in commercial vehicle volumes will boost Tata’s top line and increase cash flow, the impact of this rise on the company’s stock could be limited. Commercial vehicles form almost three-fourths of the net volumes for the standalone business, which forms less than 5% of Tata Motors’ valuation by our estimates.

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1. Volkswagen press release [↩]