Why Tata Motors Share Is Falling?

This is another stock which has a high retail holding and thus one of the most searched phrases these days is to why Tata Motors is falling so much lately. Thus I thought it should be a good topic to discuss and share my view with my readers. Tata Motors shares have fallen from almost 1400 levels to 700 today, halved where as market index has just fallen less than 25%. Tata Motors is just another stock facing problems with high interest rates and global slow down which is hurting it’s earnings outlook.

When interest rates start going up, four wheelers and heavy vehicles segment in the auto sector starts facing problems. Their sales don’t grow and in some cases even comes down. Due to lower sales figures these auto companies shares starts crashing as people take out money from these companies and look for better alternatives in the market. Why Tata Motors is falling down the most in the whole auto sector is because of the JLR front. Due to slowdown expected in US/Europe or say recession fears, it could take a big hit on the JLR sales of Tata Motors. Last quarter Tata Motors disappointed with flat profits YoY and even margins came under pressure. So all of a sudden earnings outlook has gone weaker and people are selling the stock. I won’t be surprised if Q2 FY12 is disappointing as well.

Tata Motors Shares Looks Cheap

Tata Motors indeed have some problems but the kind of selling we have seen is not justified at all. Tata Motors has come down to a 5 kind of P/E multiple and that is sad. Tata Motors posted an EPS of 135 for FY11 and the stock currently trades at 700, P/E of close to 5. What makes it worse that there could possibly be more fall here as global worries increases day by day. Even if they post a degrowth of 10-11% and EPS comes down to 120, Tata Motors is still cheap, specially if further fall is seen.

Should you buy Tata Motors Shares?

I am expecting Tata Motors to fall some more from current levels, perhaps 7-10% more and then Tata Motors could possibly start looking even more cheap. If Tata Motors falls close to 650, then one can start accumulating the stock but enter in small quantities and use the buy on decline approach where you buy little quantities in every 5-7% decline. That way you can get a good average if the share falls more. It is very hard to predict the bottom when panic selling is happening, so take a good strategy of buy on declines and keep accumulating this good quality share. In the long term you will make a lot of money as you are buying a good company on such a cheap valuation.

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  • unreal2

    if one is looking to enter TATA motors…. i’d suggest buying DVRs instead of Ordinary Equities

  • http://www.mayankrocks.com Mayank

    Can you explain the DVR concept? I could never really get it. Why would it be better to buy DVR? I have seen a few people telling that difference has widened between Tata Motors DVR share and Tata Motors share.

  • unreal2

    DVRs are just like normal shares but with different voting rights.

    for every 10 TATA motors DVR shares u get 1 voting right (10%).
    therefore, to compensate for the less voting rights a DVR shareholder is
    paid Re 0.50 (5% on face value) higher dividend and a lower share
    premium.

    now u’ll ask how u will one benefit buying DVRs over ordinary equity rite?

    well actually the concept of DVR are not properly understood by the
    market. currently TML DVRs are trading at 44% disc to ordinary equity,
    when the issue was launched there was a discount of 10%.

    Except For Korean companies, the disc of 44% is pretty high as compared
    to other DVRs across the globe. most analysts believe that it shld trade
    at a disc of ard 25-30%, if not 10%, while many call for the 10%

    as for the voting rights, If the voting has happened on poll or postal ballot you will be having
    the representation for the DVR and one share one voting right for the
    ordinary shareholder, but suppose if some shareholder is attending the AGM and
    the elections or the voting happens on a show of hands. In case of show
    of hands both (DVR & Ordinary shareholders) will be having the same rights because on show of hands it
    is the person which is counted as a one person one vote and not on the
    basis of the holding.

    so suppose u buy 10 TML DVR @ 400 instead of buying 6 ordinary shares  @
    700 and the disc of DVRs compared to ordinary equities comes down to
    say 30% and let us assume that the price of TATA shares rises by 10% in
    the nxt 1 yr, then 1 DVR will be worth ard Rs. 540 compared to the RS
    770 of ordinary share. and also if the company declares a dividend of RS
    10 on normal shares then u will have a dividend of Rs 21 (10.5*2). so
    in short, ur 4000 invested in DVRs will become 5421 compared to the 4640
    of normal shares. in other words a 17% appreciation.

    i hope i was able to explain properly coz i suck at writing!