Tata Motors (NYSE:TTM) saw revenues rise 23% year-over-year to 2,328 billion rupees (around $39.46 billion) in the fiscal year ended March 2014. This increase was primarily fueled by growth in volumes for the luxury brands Jaguar and Land Rover. The combined sales for the two premium marquees grew 15.5% to nearly 430,000 units in the last fiscal.  In comparison, Tata’s own passenger and commercial vehicle business suffered a 31% decline in unit sales during this period, as both the India and export volumes fell. Tata branded vehicles formed 57% of net volumes in the last fiscal, but this division constitutes less than 5% of the company’s valuation by our estimates. This is mainly due to lower average vehicle price for this division, and fatter margins for the Jaguar and Land Rover divisions. In fact, compared to the average revenue per unit of $75,229 for Jaguar Land Rover brands, the figure for Tata brands stood at $11,722 in fiscal 2014. However, average revenue per sale grew 12.7% for Tata branded vehicles, excluding the impact of currency translations, as the proportion of the lesser priced passenger car vehicles decreased. It has been a tale of declining sales for the company in India in the last couple of years, but the passenger car segment has fared even worse than the commercial vehicle segment. While commercial vehicle volumes fell 29% in the last fiscal, passenger cars witnessed a larger 39% decline in unit sales.
Following the launch of its Horizonext strategy and expansion in the compact car segment in India, Tata will aim to recover some of its lost share in the ailing domestic automotive industry. Our price estimate for Tata Motors is $38.95, which is roughly 2.67% above the current market price.
Tata’s Passenger Car Sales Continue To Decline In India
Cars formed just over one-fifth of the domestic volumes for Tata last fiscal, down from around 30% in fiscal 2012. While both commercial vehicle (light, medium and heavy) as well as sports utility vehicle (SUV) volumes declined in the last couple of years, the fall in passenger car unit sales has been more pronounced. Part of the problem has been a non-conducive automotive market environment in India. A negative consumer sentiment due to high inflation, unstable fuel prices and high interest rates have hurt demand for automobiles in the country. Passenger vehicle sales declined 6% year over year in fiscal 2014, posting negative sales growth for the first time in 11 years.  Fitch Ratings expects this trend to continue in fiscal 2015, predicting a 3%-8% fall in passenger vehicle sales volume. 
But what has hurt Tata’s passenger car business more is the loss of market share, apart from the contracting market size. Poor quality perception and higher acceptance in fleet have impacted retail sales for Tata Motors. In the first two months of fiscal 2015, passenger car sales have further declined by 29.4% year-over-year.  In order to reverse this trend, the company announced Horizonext in 2013, an aggressive strategic plan for its passenger vehicle business unit. According to this strategy, the main focus for Tata is to improve customer satisfaction, especially the after-sales services.
Tata Looks To Strengthen Its Compact Portfolio
The compact car segment forms more than 30% of all passenger car sales in India. According to the Ford India President, compact car sales are expected to double by 2018 from around one million units in 2013.  This surge in demand in expected to be fueled by rising disposable incomes in the second most populous country in the world, and also owing to the increasing demand for fuel-efficient smaller cars due to rising fuel prices. Earlier this year, Tata Motors unveiled a new hatchback, the Bolt, and a new sub 4-meter compact sedan, the Zest. In addition, Tata also aims to compete with Maruti Celerio and Ford Figo in the compact segment with the launch of a small car, code-named Kite, in the latter half of 2015. The Kite will be built at the company’s Sanand plant in Gujarat, which has an installed capacity of 250,000 cars a year. Tata plans to use around 60% of the capacity at Sanand for production of the Kite.
The company’s compact car brand Indica has suffered due to higher acceptance in fleet, whereas the small-city car Nano carries a “poor man’s car” perception. Hurt by the loss in share in the fast growing compact segment, Honda overtook Tata as the third largest passenger car company in India last year, behind Maruti and Hyundai. With the introduction of the Kite, along with the Bolt, Tata will look to compete with Maruti, Hyundai and Honda in the domestic compact car segment. We currently estimate Tata branded vehicles’ market share to reach 17.2% by the end of the decade, and the Indian automotive industry to sell 4.83 million vehicles annually by that period. Even with the aggressive forecast for the market share to rise to 25%, and the overall industry to sell 5.5 million units by 2020, there will only be a 1.5% upside to our valuation. This is mainly because we estimate most of Tata’s value to come from the Jaguar and Land Rover divisions (over 95%).Notes: