Volkswagen Valuation Without Scandal Makes Tata a Top Pick

  • Analysts are most bullish on Tata among global automakers
  • New products to help reverse declines, Credit Suisse says

Tata Motors Ltd., the world’s most-loved automaker by equity analysts, is trading in the stock market like it’s scandal-hit Volkswagen AG.

The Indian manufacturer of the Jaguar and Land Rover brands is the top-rated stock among the 26 biggest automakers worldwide, with a recommendation consensus of 4.8 on a Bloomberg scale where 5 is a unanimous buy. Yet its shares have tumbled 19 percent this year, dragging valuations to the same level as Volkswagen -- which is recalling millions of vehicles after cheating on diesel emissions.

Investors are underestimating Tata’s potential to boost earnings from new products, which will offset falling Chinese demand for luxury vehicles, according to Credit Suisse Group AG. The company trades at 8 times projected 12-month earnings, the third-cheapest level among members of India’s benchmark S&P BSE Sensex index.

"The Jaguar Land Rover unit has a very strong product cycle in the coming months," said Jatin Chawla, an analyst at Credit Suisse in Mumbai. "The volume trend, which has been flattish overall, is likely to start improving to double-digit growth from November.”

Chawla has a outperform rating on the stock, which he predicts will climb 24 percent over the next 12 months from Friday’s close. The shares fell 1.9 percent to 396.2 rupees. Tata has 47 analyst ratings equivalent to buy, three neutral recommendations and two sells.

Investors are starting to turn more bullish. Franklin Templeton Asset Management India Pvt. bought more than 2 million shares of Tata Motors in September, when the stock reached a two-year low, while ICICI Prudential Asset Management Co. acquired 1.8 million shares the following month. Tata Motors is the top-performer on the 30-member Sensex this quarter with a 33 percent gain.

U.S. sales at the Jaguar Land Rover division, which brings about 83 percent of Tata Motors’s revenue, surged 76 percent in October, boosted by demand for Range Rover and Evoque sport-utility vehicles. New models include the Jaguar XE and Discovery Sport.

The economic slowdown in China, which contributes about 29 percent of revenue, has dragged down profit for four straight quarters. Tata Motors reported an unexpected net loss of 4.3 billion rupees ($65 million) in the September quarter, compared with a 32.9 billion rupees profit a year earlier, the company said after trading hours on Friday.

Jaguar Land Rover suffered a 92 million pound loss, and Tata Motors took a one-time charge of 24.93 billion rupees on damages to the vehicles of its luxury unit from a blast at Tianjin port where they were stored.

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