Thursday, September 29, 2011

Tata Motors Share trading at big discount: Reuters

LONDON: Tata Motors is in no rush to replace its CEO, who stepped down on Sept. 9. It is not the only gap at India's largest auto maker. Shares in the firm, which also owns Jaguar and Land Rover, trade at a big discount to peers. A new CEO might find value by integrating the business more fully.

Tata Motors' market value has slumped 30 percent over the past six months. Its enterprise value sits at a paltry 3.2 times estimates of 2012 EBITDA, based on data from InFinancials. The equivalent number for Ashok Leyland, an Indian competitor, is 6.3. JLR is perhaps better compared to BMW which has a ratio of 7.6.

The market values Tata Motors at around $10 billion. Yet JLR alone would be worth around $13 billion if its value matched its peer group. The rest of Tata Motors may fetch $7 billion if it was put on a par with its other Indian automakers. True, it is easy to miss important differences of detail when drawing parallels such as this. But is Tata Motors really worth no more than half that which peer comparisons suggest it could be?

Concerns over JLR's future sales in the UK and US in light of the current economic climate partly explain the share price discount. Given the level at which shares in the firm trade, a demerger can't be ruled out. There were rumors earlier this year that JLR might be listed separately in London. But the alternative is to work harder at finding real benefits of running the two units together. Costs shared in development of new engine technology and in building markets in other emerging economies -- especially China -- are a start, but no more than that.

Tata acquired JLR in 2008. It deserves credit for returning the upmarket marques to profit. And the 1.15 billion pounds Tata paid Ford now looks like a bargain. But instead of soft peddling on replacing Forster and running the two units as parallel concerns, Tata ought to step up the search for a new CEO. And fight harder for the synergy benefits that underpinned the logic of the JLR purchase in the first place. 

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

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