Investors with a one-two year perspective can buy the Tata Motors stock with Differential Voting Rights(DVR). Improving liquidity in DVR and promising growth prospects for the company is likely to narrow the price gap. Presently, the DVR trades at about 45 per cent discount to the company shares.

Issued in late 2008, the DVR shares carry one-tenth the voting rights of, and 5 per cent more dividend than, the ordinary shares. Illiquidity and lack of institutional interest has seen these shares trade at a wide discount to the Tata Motors stock. That DVR holdings have gradually changed hands from promoters to domestic and foreign institutional investors only points to improving liquidity.

At Rs 157, DVR shares trade at a very reasonable price-to-earnings ratio of about four times the company's estimated earnings for 2012-13. At Rs 278, the Tata Motors stock trades at 7.2 times.

Superior product and market mix

With JLR bringing in over half the consolidated revenues, worries about a slowdown in its key markets of Europe and the US haunted the company last year. Besides, after two successive years of 26 per cent growth, the domestic auto industry too showed signs of overheating. However, the company put up a good show in the April-December 2011 period.

For the nine-months ended December 2011, consolidated net sales grew 32 per cent to Rs 1,14, 747 crore, while net profits rose by about 10 per cent to Rs 7,283 crore.

Compared to 14.9 per cent in April-December 2010, EBITDA margins came in at 14.4 per cent. Although the domestic business was a drag, this performance was aided by a strong volume growth of 22 per cent year-on-year and favourable product and market mix at JLR.

Going forward, this trend is expected to continue. First, JLR volumes have remained robust in January and February, growing by 44 per cent and 49 per cent respectively. Moreover, throughout 2011, Land Rover vehicles (Range Rover vehicles, in particular), which enjoy greater pricing power, have shown superior volume growth compared to Jaguar.

The Range Rover Evoque introduced in mid-2011 has been a major contributory to this. Land Rover vehicles now bring in over 80 per cent of the total volumes. Besides the Evoque, Jaguar products such as the MY12 (model year 12) XF and the 2.2L Diesel are also expected to drive growth.

Two, considering the limited potential for growth in the developed markets, the company is focusing on emerging/developing markets such as Russia, China, Brazil and South Africa for the next stage of growth.

For example, China's share of total JLR volumes has improved from about 10 per cent in April-December 2010 to 16 per cent in the same period in 2011. JLR has recently entered into a joint venture with Chery Automobile Company in China for the manufacture/assembly of Land Rover vehicles there.

Double-digit margins

On the operating front too, despite the pressures from the domestic business, the company has been able to maintain margins at 14 per cent , thanks to JLR.

Lower raw material to sales proportion in comparison to Indian manufacturers, variety reduction in materials, standardisation of parts across models and platforms and improved sourcing from low cost destinations such as India and China (at over 20 per cent currently) has helped. As a logical step forward, JLR plans to set up an engine manufacturing unit in India in the near future.

Domestic prospects to improve

Back home, due to the cyclical downturn in the CV (commercial vehicles) industry, medium and heavy CV volumes grew only by 8 per cent in 2011-12. However, with good cargo availability from agriculture and manufacturing, truck rentals have remained firm in the first three months of 2012.

A cut in interest rates from hereon will provide an impetus to economic activity, which will aid higher volume growth in this segment. Light CVs (LCVs) are not subject to this cyclicality; LCV sales grew by 27 per cent in 2011-12.

The company therefore is leveraging on this segment to diversify the risk of a slowdown by expanding capacity for small CVs. In the passenger segment though, competitive pressures remain. It is increasing its marketing spends and expanding the dealer network to improve its market share here.

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