Tata Motors’ shares have underperformed its four-wheeler peers namely Maruti Suzuki and M&M over the last decade. While Tata Motors’ market capitalisation has grown around four times, those of Maruti and M&M grew 12 and 7 times, respectively as on May 30, according to data provided by Capitaline.

The market capitalisation of Maruti Suzuki is now almost triple that of Tata Motors (in 2008, Tata Motors was ahead of Maruti Suzuki by ₹382 crore). The valuation gap between Tata Motors and Maruti Suzuki has exploded because of superior financial performance by the latter, thanks to a boom in the domestic passenger vehicles market, Maruti’s continued market leadership and successful launches.

Compounded annual growth rate in sales and adjusted net profit of Maruti have seen it outperform Tata Motors on three-, five-, and 10-year basis (ending FY17) .

In FY18, Maruti’s topline growth of 17 per cent exceeded Tata Motors’ 9 per cent, but profit growth of 5 per cent was lesser than that of Tata Motors.

The gap between Tata Motors and M&M was 1.5 times in 2008 but the latter was able to bridge the gap and surpassed Tata Motors on April 25 this year.

In FY18, M&M’s performance was better than Tata Motors, with the former registering sales and adjusted net profit growth of 10 per cent and 59 per cent, compared to 9 per cent and 15 per cent by the latter.

Eicher comes closer

Not only four-wheelers, but the market capitalisation of two-wheeler major Eicher Motors (best-performing automobile stock) too, is now close to Tata Motors.

The gap in market capitalisation has reduced dramatically — from 25 times to 1.1 times in a decade.

This is because Eicher Motors has exhibited stupendous jump in profitability consistently in the last decade (ending FY17) — best among automobile companies — though topline growth has underperformed Tata Motors.

Based on average target prices estimated by analysts, the Tata Motors stock provides the highest upside potential of 37 per cent among the four stocks mentioned above, only because of its huge past underperformance and lowest FY20 price-to-earnings multiple of around 10 times.

Otherwise, the outlook on business is worrisome. “Undemanding valuation post steep correction makes the risk-reward favourable in our view. Near-term demand outlook for JLR remains challenging due to weakness in key markets of the UK, Europe and the US. For standalone business though, outlook is strong, helped by strong macro and likely improvement in market share trends,” said Jefferies on Tata Motors.

M&M, analysts’ favourite

Analysts unanimously vote for M&M due to reasonable valuation amid good fundamentals. Analysts expect 13 per cent rise in its stock price. There are mixed views on Eicher Motors, which is trading at 25-30 times FY20 estimated earnings. According to analysts’ target price, there is a potential for gains of 16-18 per cent in Maruti and Eicher. “We continue to like Maruti’s unique moats, though valuation (23x FY20E versuss five- and 10-year median at 17/20x) leaves little upside,” said HDFC Securities, which has a neutral rating. Elara Capital recommends to accumulate the Maruti Suzuki stock.

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