The Nifty Auto Index is down nearly 28% from its highest level in September 2024. It’s not surprising what led to the fall. US tariff concerns, the slowdown in automobile demand, and a broader market correction. As a result, most automobile stocks have fallen sharply.
In the auto sector, Hero MotoCorp has suffered the most, with its stock price falling 37% in the last six months. Tata Motors too fell a sharp 33%, drastically reducing valuations. Notably, both companies are not only trading below their 10-year median valuation but also relative to their peers.
Is this an opportunity to add the stock to your watchlist? Let’s dig in and find out.
Tata Motors is one of the leading automotive manufacturers in India, with a market capitalization of ₹2.46 trillion. The company manufactures commercial vehicles (CV)and passenger vehicles (PV), including compact, mid-size and utility vehicles.
The company also operates in the premium segment with its luxury brand, Jaguar Land Rover (JLR), which contributes 69% of its total revenue. It has a diversified presence across geographies, including Europe, the UK, the US, and China.
Tata Motors leads the CV segment in India with a market share of 39% (in FY24) and ranks second in the PV segment with a 13.9% market share. With its first-mover advantage, it also leads the electric vehicle (EV) segment, with 62% market share.
Notably, Tata Motors was a loss-making company with inconsistent revenue and profit growth till FY21. However, the company’s financials improved after the pandemic as demand for PVs surged, led by record-low interest rates and rising affordability.
Strong demand helped the company turn around its business. Tata Motors’ revenue grew at a 20% compound annual growth rate (CAGR) during FY21-24 to ₹4.4 trillion in FY24. On the other hand, it turned in a net profit of ₹2.7 billion in FY23, which increased to ₹318 billion in FY24.
The CV business contributed 18% (or ₹0.79 trillion) to total revenues, growing 11% year-on-year (YoY) in FY24. An uptick in demand, improved product mix, and price hikes drove average selling prices and revenue growth. However, CV business profit grew marginally by 2.4% to ₹53 billion due to higher input cost, and product development, and engineering expenses.
On the other hand, Tata PV business revenue grew 9.4% YoY to ₹0.52 trillion, contributing 12% to its total revenue. This steady growth was driven by a 6% rise in wholesale volume and an increase in average selling price. However, rising input costs impacted PV business profit, which remained flat at ₹10 billion, with stagnant margins (6.5%).
The remaining revenue comes from JLR, whose turnaround helped Tata Motors turn profitable. JLR revenue grew 27% YoY in FY24 due to improved demand in its key international market. While, it turned profitable from a loss-making company last year, as its margins improved by 6%.
Tata Motors aims to maintain its dominant position in the EV segment, not only in India but globally, as the demand for EVs is growing. It plans to invest ₹160-180 billion in its EV division by FY30.
The company will use this capital to expand its EV portfolio, aiming to increase the share of electric vehicles in its total sales to 30% by 2030. It has also set an ambitious target of increasing its market share in the PV segment to 18-20% by FY2030 from 13.9% in FY24.
Following this philosophy, it has renamed its EV business Tata.EV. It is also expanding its Sanand plant and setting up a 20-gigawatt-hour lithium-ion battery manufacturing facility. In addition, TML plans to launch six more electric vehicles by FY26, bringing the total number of models to 10.
Meanwhile, JLR aims to become a net debt-free company by FY25 after turning profitable and free cash flow positive. It is also investing £15 billion to make the brand electric by 2030.
However, Trump’s 25% tariff on auto exports to the US remains the main headwind, and it could derail Tata Motors’ growth plans. JLR sold over 4 lakh units globally in FY24, of which 23% were accounted for by the US. If Trump sticks to his tariff plans, this is bound to have an impact.
According to Morgan Stanley, JLR has three options – pass on the cost to the consumer, cut costs, or bear the loss. If JLR chooses to bear the impact, its margins will shrink by up to 2%, and free cash flow will suffer.
As a result, it will potentially be forced to consider setting up a manufacturing facility in the US to mitigate the loss. Still, short-term impact is inevitable.
Sector-wise, the automobile sector is in a strong position despite some cyclical demand slowdown. India is expected to sell over 5 million PVs in the next few years, up from 4.1 million last year. Further, vehicle penetration in India is also lower than global norms, at around 30 vehicles per 1,000 people, and is expected to grow.
With its dominant position, Tata Motors is well-positioned to benefit from this growth. It is expected to be driven by rising GDP, middle class proportion, per capita and disposable income. Further, TML will also demerge its PV and CV businesses, which could unlock shareholder value.
The stock trades at a P/E multiple of 7.7, a deep discount to 10-year median PE of 14.3. Compared to its peers, it also trades at a huge discount to Mahindra and Mahindra (26.8), and Maruti Suzuki (25).
Hero MotoCorp is engaged in the manufacturing and marketing of motorcycles and scooters. It is the largest two-wheeler manufacturer in the world, as per ICRA.
Backed by a large product portfolio across various price segments, Hero Moto is a market leader in the domestic motorcycle industry, with a market share of 43% (as of FY24). It is also present in the scooter market, with a marginal share of 7% in FY24.
The company has shown stagnant growth for over 5 years due to subdued demand from the rural sector. Its revenue grew at just 2% CAGR during the period to ₹378 billion in FY24, while its profit rose 2% to ₹37 billion.
Notably, Hero Moto’s performance improved in FY24, with its revenue growing 11% YoY, thanks to improved rural sentiment. On the other hand, net profit rose by a robust 33%, driven by improved operating margins.
Looking ahead, the company is looking for 14-16% margin, driven by operating leverage, sales mix improvement, premiumisation, and sales mix improvement. It plans to strengthen its position in the 125cc motorcycle segment and increase market share in the scooter segment.
For this, the company plans to attract first-time buyers and leverage its broad reach through retail financing. It also plans to diversify its presence in the top 10 markets globally. In addition, the company has entered the premium two-wheeler market with Harley Davidson to strengthen its market share in the fast-growing premium segment.
Hero is also trying to accelerate growth in other revenue streams, such as parts, accessories, and merchandise. This business stream saw a 90% growth during FY19-24, with revenue reaching ₹54 billion in FY24.
Hero MotoCorp is facing challenges. Loss of market share due to increasing competition, slow EV transition, and unstable rural demand remain concerns. The company has also recently seen senior management exit, which raises doubts about the stability of the leadership.
Hero MotoCorp is trading at a P/E of 18, 17% lower than its 10-year average P/E of 21. Compared to its peers, it is trading at a significant discount to TVS Motor (59), Eicher (33), and Baja Auto (30).
Conclusion
A stock trading at a lower valuation than its peers and historical valuation should not be considered a certain sign of recovery. This is because cheaper valuation could be due to poor growth, market share, subdued demand, or some other headwinds, etc.
Here, too, Hero is witnessing subdued demand, although it is recovering, while JLR continues to be a problem for Tata Motors. The same is reflected in their share price and valuation. So, it is important for investors to keep track of the progress by adding these stocks to their watchlists, perhaps.
Disclaimer:
Note: We have relied on data from throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.
About the Author: Madhvendra has been deeply immersed in the equity markets for over seven years, combining his passion for investing with his expertise in financial writing. With a knack for simplifying complex concepts, he enjoys sharing his honest perspectives on startups, listed Indian companies, and macroeconomic trends.
A dedicated reader and storyteller, Madhvendra thrives on uncovering insights that inspire his audience to deepen their understanding of the financial world.
Disclosure: The writer and his dependents do not hold the stocks discussed in this article.
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