Ten year period (2004-05 to 2014-15)
Five year period (2009-10 to 2014-15)
  L M T
10 year sales growth 11.44% 24.78% 28.92%
5 year sales growth 13.95% 25.40% 23.22%
   
10 year profit growth -1.92% 13.00% 27.28%
5 year profit growth -7.92% 4.17% 55.84%
   
10 yr avg ROCE
16%
22% 19%
05 yr avg ROCE 12% 19% 21%
   
10 YR AVG ROE 11.00% 20.11% 29.79%
5 YR AVG ROE 7.55% 18.69% 34.66%
Debt Equity 0.82 1.47 1.31
   
Book Value 15.00 437.00 174.00
   
Price 18/3/2016 95 1213 365
   
Price to Book 6.33 2.78 2.10
   
TTM EPS 3.07 50.52 23.22
   
P/E 31 24 16
       

The above is a snapshot of some numbers of three players from the automotive industry. See the numbers. Are we overpaying for something? And does any one in particular look attractive?

Of course, the risks in each one are different. Ashok Leyland- A dull player, with a mediocre track record.. Will it grow rapidly and profitably to justify the valuations being given by the stock markets?  M&M – the darling of the markets- Has a lot of debt on its books, but backed by good ROCE. A downturn can hurt it badly. And Tata Motors, a company whose fortunes now lie outside India. JLR driving the numbers. Solid numbers, but markets do not seem to be convinced.

As an investor, what do you choose?  I will certainly not neglect this sector. High growth, consumer spending led is where we should go.

Each company has its story. M&M has become a star. Tata Motors riding on JLR. Leyland not clear about its product baskets or collaborations either. Just walked out of a marriage with Nissan. OK, I am biased, but let the numbers above speak.

You say, let us look at projections? You mean what has not been achieved in last forty or fifty years will change? If you believe in fairy tales…

14 thoughts on “Of Leyland, M&M and Tata Motors”

  3. Hi Bala.

    The headline numbers tell you a story for sure, but to get a clear picture on these 3 companies, we need to dig a little deeper.

    L – you’ve rightly pointed out about its numbers and closer look would reveal similar analysis.

    M – I believe you have used consolidated numbers here. It is to be noted that M&M also has a financial business that distorts the picture with respect to its leverage. Standalone business is strong. Having said that, it is important to see it as a conglomerate now. Though auto business contributes max to its overall value, Tech M and finance business also has fair share.

    T – High RoE is a gimmick here. Can be achieved by either increasing the numerator or it can be achieved by lowering the denominator. T have been making some charges directly via its networth and thus lowering it’s equity. On the other side, some aggressive accounting as well with respect to product development costs. 80% capitalisation rate. Sustainability of earnings is thus a question mark.

    Just thought of sharing this. The conclusion that you have presented remains the same.

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    1. Great insights. Consolidation is a bitch. But often, the finance business ends up being the snake that swallows the calf. I do not like the fact that M&M are in the finance business, no matter how well they seem to be doing it. One day, it will pull the house down. TaMo is a high risk play. JLR is like whipped cream. One day it tastes great, another it is sour. The key thing to remember is that it was a bargain acquisition. And it has probably recovered its acquisition cost. M&M may be the most stable one, if finance business is taken away. Now they have added a mutual fund too… God Bless them

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  5. analysis is incomplete. you forgot to look at a key statistic
    profits vs cash generated vs fcf generated

    for a 5 to 10 year period try looking at total cash generated vs total capex and total fcf generated for all the three on a consolidated basis.

    you will see some interesting things..:)

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    1. Thanks, Ajay. Good pointers. Please read my follow up post also. And please keep your comments going. Every comment is informative and valuable.

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  6. ROE=Earnings/(Equity capital employed); ROCE=Earnings/(Total capital employed) . Total Capital Employed=Equity Capital+Debt capital. Correct me if I am wrong-if Earnings, Equity capital and debt capital are all positive, ROE>=ROCE. How come M&M ROE is less than ROCE?

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    1. Can happen due to consolidation of Finance sub with mfg- For Finance, we should not be looking at the absurd ratio. Other thing is a company’s tax rates can impact the difference between ROCE and ROE

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    2. Hi, the numerator is not the same in both the ROE and ROCE formulae. ROE is the earnings to equity holders alone, hence divided by equity capital.. ROCE is the earnings or profit for both equity and debt holders (this is a number before interest payment).. this is divided by debt + equity, which is the total capital employed..

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  7. Great post for beginners like me. But if history is a factor for investing in shares then only large caps would be the desired ones.Also hasnt AL shown month on month increase in Sales since past one year. Maybe something is happening here which has not happened before. An LCV like “Dost” also didnt happen in the past.
    I am new to this just my 2 cents, could be wrong.

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    1. Good observations- AL has not made a success of its LCV or its foray in to passenger vehicle ( a cheap and poor imitation of Innova was launched- Do not know where it is now) . They are late with the small vehicle by nearly thirty years. Utter lack of understanding their own industry. And there is a profit culture which is very unlikely to change so much that the ROE will jump. There could also be some captive sales happening to some fleets which push numbers higher.

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