Tata Motors Accelerates Capital Expenditures To Drive Future Growth

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Tata Motors (NYSE:TTM) is on an investment spree, looking to launch new products, develop new technologies, and expand its production capacity around the world. Capital expenditure for the luxury vehicle division Jaguar Land Rover (JLR), which forms more than 95% of the group’s valuation according to our estimates, rose to 12.4% of the divisional revenues in fiscal 2014 (ended March), and is expected to further rise this fiscal year as the division is expected to incur a massive 40% increase in capital expenses. This is as a result of higher investments in new product lines such as the Jaguar XE, a compact sedan to be launched this year, and capacity expansions in markets such as China and Brazil.

On the other hand, Tata is looking to make a comeback in India, where its standalone business has reported falling vehicle volume sales in both the passenger and commercial vehicle segments in the last two fiscals.  For this purpose, the company is looking to raise its standalone business’ average annual CapEx by 25% to Rs.4,000 crore rupees (around $650 million). This will result in a cumulative $1.6 billion increase in the group’s average annual capital expenditure in the near to mid term. [1]

Trefis’ price estimate for Tata Motors is $44, which is around 11% below the current market price. The stock has fallen by 1.6% this week.

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JLR Expanding Production Capacity

Volume sales for Jaguar Land Rover rose 16% and 18% in the last two fiscal years respectively, owing to the high luxury vehicle demand around the world. The British marquee car maker has also looked to augment its current volume sales by building more manufacturing facilities closer to the end customer and in low-cost countries. The company will begin local production in its single largest market, China, by Q4 of this fiscal year, and has started building its first fully-owned manufacturing facility outside the U.K., in Brazil. Local production will help the automaker feed local demand at competitive prices and also help evade supply constraints that limit the sale of JLR vehicles. The company aims to build three models in the China plant, in partnership with the Chery Automobile Company, with an initial annual production capacity of around 130,000 vehicles, by 2016. On the other hand, the $290 million (750 million Reals) Brazil plant in Itatiaia, near Rio de Janeiro, will employ 400 employees, include an education and business center, and have an annual production capacity of 24,000 vehicles.

On the other hand, JLR is also extending its manufacturing capacity in the U.K., where the new Jaguar XE and the SUV F-Pace are being built. Both the models will be built on the same lightweight aluminum monocoque at JLR’s Solihull factory, where for the first time Jaguar models will be manufactured (only Land Rover models were built before this). The company has already invested £1.5 billion (around $2.3 billion) to support the introduction of its new aluminum and lightweight technologies, and plans to create 1,300 new jobs. Extending production capacity will remove supply constraints at JLR, and could possibly fuel volume growth going forward.

Tata Motors Looks To Spur Domestic Sales

Tata Motors’ R&D spend in its domestic operations has risen over the last few years, from 3.3% to 6.3% of the net sales in fiscal 2014, as the company looks to launch new products and revamp its existing model-lineup, in a bid to reverse the trend of declining sales in India. Tata announced Horizonext in 2013, which is an aggressive strategic plan for its passenger vehicle business unit. Over the last two years, the company unveiled eight newly upgraded and enhanced products across five passenger vehicle brands and introduced new products such as the E-max range of CNG vehicles and the Nano Twist with electric power steering. Recently, Tata launched its new models (without a predecessor), the Zest and Bolt, to compete in the fast-growing compact segment. Higher CapEx will dent Tata’s financials in the near term, but with higher investments in research and development and more capital spending, the company hopes to revitalize its domestic sales and push for higher growth in the luxury space through Jaguar Land Rover, going forward.

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Notes:
  1. Tata Motors planning to raise capital expenditure by Rs 10,000 crore a year []