Wise investors often say that the greatest opportunities emerge when you swim against the tide. This case study takes a closer look at a bold investment decision we made a few years ago — our choice to invest in Tata Motors.
The Context
- Investment Cost: ₹94.00 Each
- Currently Priced at ₹1,109 (September 2024)
- Net Returns Soared to ~1080.21% (Overvalued)
- Status: We Are Holding The Line!
The year was 2020, at that time, most investors were in a state of panic, rapidly selling off their Tata Motor shares due to the company’s ongoing losses in previous years and the unforeseen disruption caused by the unexpected COVID-19 pandemic – a nightmare scenario nobody could have predicted. Instead of blindly following the mass hysteria, we charted a different course. Our decision was driven by a firm belief in the principles of deep value investing, leading us to this unconventional path.
In this specific case study, we’ll reveal some investment principles, heavily influenced by the ideas of Benjamin Graham, the pioneer of value investing. We’ll also explore the effectiveness of deep value investing, a strategy that involves a comprehensive evaluation of an investment’s true value especially during distressed times, and maintaining long-term positions without frequent buying and selling.
Scouting Tata Motors
You’ve likely heard of Tata Motors, right?
They’re a prominent Indian automotive company known for manufacturing a wide range of vehicles, from affordable cars to rugged trucks, versatile vans, and even large buses. If you’re a car owner, chances are you’ve come across some of their popular models like Tiago, Nexon, Harrier, Tigor, Safari, or Hexa.
You can check out their website by clicking here.
It is a well-known large-cap company with a market capitalization of approximately ₹2,28,000 crores as of September 2023. While the company boasts a diverse product line, its sales growth rates haven’t been particularly impressive over the last decade, fluctuating between 6%, 3%, and 10% over the past 10, 5, and 3 years, respectively. When examining the year-on-year return on equity (ROE) for Tata Motors, there are some concerns. ROE has shown varying rates, with 5%, -8%, and -7% over the past 10, 5, and 3 years, respectively.
Recently, the stock has experienced notable price movements, partly due to a bullish market trend, changing consumer preferences, and economic developments in our country. However, it’s essential to remember that the automotive industry is cyclical, meaning its performance is often tied to the overall economy. During economic downturns, consumers and businesses may postpone vehicle purchases, impacting stock prices. Smart investors need to be mindful of this cyclical nature.
Backtracking Tata Motors
Before we write more about this peculiar case study, it’s crucial to acknowledge the challenges Tata Motors has faced throughout its history. The company has encountered various hurdles, including design issues with vehicles, a strong association with pure utility models like the Indica taxis, political disputes like the proposed Singur plant in West Bengal, and the rollercoaster ride of the highly-publicized yet ultimately unsuccessful “world’s cheapest car,” the Nano.
In 2019, Tata Motors faced a significant setback on February 8th when its stock plunged by more than 18%. This sharp decline was primarily triggered due to Tata Motors reporting a substantial loss of Rs 26,961 crore in their Q3 earnings, driven by weak sales in China. At that time, Tata Motors heavily relied on Jaguar Land Rover (JLR), which contributed a significant 80% of their revenues.
JLR’s challenges were linked to international political issues beyond Tata Motors’ control. Fidgety investors typically dislike waiting and often punish such stocks without much consideration. Those uncertain about the situation tend to follow the crowd and sell these stocks while questioning their choices. Market sentiment further pushed the stock down, with research firms issuing warnings.
However, Tata Motors excelled in managing the aspects within its control, thanks to sharp management decisions and a skilled workforce. Despite the obstacles, their passenger vehicles (PV) continued to outperform the industry, their commercial vehicle (CV) division remained profitable, and their EBITDA stayed steady even in a challenging market.
At a time when uncertainty surrounded Tata Motors’ future, another unforeseen challenge emerged: COVID-19.
Our Tata Motors Journey
When it comes to selecting stocks for our portfolio, we are never in a rush. We conduct thorough research, often adhering to the unique strategies we advocate. Usually, we exercise patience, waiting for months or even years while watching for signs that the stock’s price will revert to its rightful value. This concept is commonly referred to as “regression to mean.”
Like Six Sigma principles of managing large-scale projects, we maintain stringent standards, and unless a company aligns with every single aspect of our comprehensive checklist, we refrain from making investment decisions.
In the case of Tata Motors, it met most of our analysis criteria, though not all. Interestingly, we already held robust automobile stocks in our investment portfolio with fair exposure to the Auto sector. While Tata Motors was on our radar, it wasn’t an immediate consideration.
This was primarily due to certain key financial metrics, such as the company’s sales and profit levels, not aligning with our typical financial analysis benchmarks. During that period, our primary focus was on the fast-moving consumer goods (FMCG) sector which was fairly doing well.
It was a middle-class quest to profit from snacks, chocolate, atta, non-refined oil, and rice but our goal was to rebalance our portfolio by allocating more funds to the automotive sector and a few other areas.
The Story Unfolds
In early 2020, Tata Motors made a significant start by introducing its BS6-compliant cars and Altroz hatchback at a major event in Mumbai. They also revealed exciting concepts at Auto Expo 2020. However, when March 2020 sales figures were disclosed, they were not promising. This was a trend across the entire automobile industry, with companies like Maruti Suzuki, Hyundai, and Mahindra also suffering due to COVID-19 and the subsequent lockdown. Tata Motors reported a significant 68% drop in passenger vehicle sales in March 2020 compared to the previous year.
The Indian stock market also experienced a challenging period due to COVID-19. Both major stock indices, BSE Sensex and NSE Nifty, saw significant declines in March 2020. This was part of a global market downturn as investors fretted about the pandemic’s impact on the economy. We saw this as an opportunity and made many strategic investments, including in Tata Motors, which had a low stock price at the time.
Tata Motors’ stock price had plummeted from ₹184.45 on January 1, 2020, to ₹65.30 by March 11, 2020, marking a correction of approximately 64%. We viewed this as a chance to acquire Tata Motors shares at an average cost of ₹94 each over a few subsequent months, believing it had strong potential for future growth. The fact that Tata Motors sometimes also paid dividends to its shareholders and had an appealing entry price made our decision even more enticing.
The Present Day
Returns are returns, whether they come from capital gains or income from dividends, don’t you agree?
Regarding Tata Motors’ stock, like many stocks we own, it has been a standout performer in our investment portfolio. It has grown in value by an impressive factor of ten (a ten-bagger) and has consistently delivered an average annual return (XIRR) of approximately 48.63% over the past three years. This translates to an impressive absolute return of around 1000%, plus some small dividends. However, it’s important to keep in mind that Mr. Market is bipolar and the automotive industry operates in cycles so, circumstances can change.
As Tata Motors adapts its strategies to align with market developments, we plan to hold onto this stock for the long term, aiming for reasonable annual returns over the next 10-15 years. When it comes to the buzz surrounding electric vehicles (EVs), we approach it with caution, recognizing that this field is still in the process of development.
In India, out of the approximately 330 million registered cars, only 2.8 million were electric vehicles (EVs) as of August 8, 2023, which is just a tiny fraction of the total. Nevertheless, we are closely monitoring this industry, and should it gain traction, we are well-prepared to seize the opportunities it presents.
We are confident that this stock can remain profitable for us, especially in line with the purchase price we paid, even in challenging market conditions. If its value does decline significantly in the future, which can happen given the cyclical nature of the automotive sector, we will re-evaluate our position. We’ll carefully assess the company’s valuation and contemplate further investments when the price matches our criteria, all in our pursuit of maintaining a well-balanced portfolio.
Conclusion
The case study on Tata Motors stock highlights the value of thinking differently from the crowd and the effectiveness of a carefully crafted investment philosophy. By going against the prevailing market sentiment, conducting their independent research, engaging in deep value analysis, and holding onto their investments with patience, investors can potentially achieve exceptional returns.
This real-life example should inspire those who are open to taking an unconventional approach to investing, underscoring the significance of patience, discipline, and a focus on the long term. Besides, it also provides insights into how resilient companies with strong fundamentals and competent management, such as Tata Motors, can navigate through challenging periods. In such situations, a combination of robust fundamentals and technical analysis plays a pivotal role in the investment journey.
We’re currently working on several case studies, and we’ll continue to share our experiences as we carry out these real-life investing experiments.
Notice: We do not offer investment advice, and our case studies are examples, not recommendations. Our focus is on education, not personal advice. Please respect our privacy and avoid asking about our investments.
1 Comment
The best article. Thank you so much for such detailed case study. Waiting for more.