Tata Motors Limited (ADR) (TTM): Diving To The Edges

While Tesla Motors, Inc. (TSLA) crashes and burns on YouTube and with its stock price, another car stock, Tata Motors Limited (TTM) is driving higher.

Based in Mumbai, India, Tata engages in the manufacture and sale of commercial and passenger vehicles primarily in India. The company's product portfolio includes micro, compact, and midsize passenger cars; premium and luxury sports utility vehicles and cars; utility vehicles; and small, light, intermediate, and medium and heavy commercial vehicles, as well as vans, trucks, buses, and defense and homeland security vehicles. It also develops electric and hybrid vehicles for personal and public transportation.

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TTM is traveling in the opposite direction of most cars stocks today thanks to an upgrade from Deutsche Bank. Analyst Srinivas Rao moved the Indian automaker to a "Buy" from a "Hold" rating.

He says, "We upgrade Tata Motors to Buy with a TP [target price] of Rs 400 (15% upside potential). The increase in TP is driven by 1) 14.3%/11.2% increases in FY15E/FY16E EPS and 2) a 25% increase in valuation, in line with the expansion in valuation multiples for automotive peers reflecting the improvement in global macro. China and the US, which account for 45% of Jaguar LandRover's volumes, have been particularly robust. For JLR, this has echoed in falling incentives, volume momentum and robust margins. Our target price implies FY15E EV/EBITDA of 7.5x for India business and 3.8x for JLR. The valuation for JLR is in line with BMW (3.5x CY14E), adjusting for differences in R&D accounting."

The new price-tag works out to $32.40 for the American TTM ADR. We get there by converting the rupee to dollars. We used the exchange rate of 0.016 rupees per US dollar, and the ADR ratio is one US share for every five shares that trade on the Indian exchange.

To hit $32.40, Tata needs to trade at 7.8 times 201! 5's consensus earnings estimate of $4.15, which 18% higher than Tata's five-year average P/E of 6.64, and well below the auto industry's average P/E of 12.86.

On a price-to-sales (P/S) basis, Deutsche Bank price target requires Wall Street to value TTM at 0.52 times next year's revenue estimate of $40.09 billion. Since September 2008, Tata Motors average price-to-sales (P/S) ratio was 0.405; so, Rao is correct in that TTM's P/S valuation needs to increase by roughly 25% to meet his mark.

Overall: It's been our experience that multiple expansion requires – at least for us to be happy about it – roughly an equivalent uptick in earnings growth rates. Based on current 2014 and 2015 estimates, the rate of change is closer to 17% than  25%, which puts $32.40 at the outer edge of where we feel comfortable.