Tata Motors more valuable than Maruti: Crowd folly or new reality?

After experiencing a substantial loss of  ₹287 billion in FY19, Tata Motors rebounded with record profits of  ₹157 billion in the trailing twelve-month period. (File Photo: Reuters)
After experiencing a substantial loss of 287 billion in FY19, Tata Motors rebounded with record profits of 157 billion in the trailing twelve-month period. (File Photo: Reuters)


  • Tata Motors topples Maruti Suzuki to become largest auto company by market cap. What next?

It has been a season of milestones, highlighted by India's ascent to the fourth largest stock market by market capitalization. In a similar vein, auto major Tata Motors has achieved a significant milestone by surpassing Maruti Suzuki to become India's most valuable auto manufacturer.

Reports indicate that the combined market capitalization of Tata Motors and its DVR (Differential Voting Rights) shares has reached 3.24 trillion, edging slightly above Maruti Suzuki's 3.15 trillion. While market positions can fluctuate, with Maruti possibly reclaiming its lead, the essence remains that Tata Motors is now on par with Maruti after a long seven years.

Seven years ago, Maruti Suzuki took the lead over Tata Motors, widening their market cap gap significantly—at one point, Maruti was valued six times more than Tata Motors. However, this gap has not only narrowed but reversed, with Tata Motors now holding a slight advantage.

This shift is attributed to Tata Motors' impressive turnaround in profitability. After experiencing a substantial loss of 287 billion in FY19, Tata Motors rebounded with record profits of 157 billion in the trailing twelve-month period, transforming the stock into a 12-bagger since its lows in March 2020. In contrast, Maruti Suzuki's value increased 2.5 times during the same period.

Despite Tata Motors achieving a valuation comparable to Maruti Suzuki, the latter maintains superior fundamentals and a stronger long-term performance. Maruti's profits, although slightly lower than Tata Motors', were achieved with a significantly smaller revenue, indicating higher margins. Additionally, Maruti boasts a better average return on equity (RoE) of 12% over ten years, compared to Tata Motors' 5%, and maintains a debt-free balance sheet, unlike Tata Motors, which has a higher debt-to-equity ratio.

The market valuation of Tata Motors, nearly on par with Maruti, reflects investor optimism about Tata's future performance, possibly even surpassing Maruti. 

However, while Tata Motors has made significant improvements, value investors should be cautious about paying too much for this potential growth. Historically, Tata Motors traded at an average price-to-book value of around 2x ((PE is not a good valuation indicator for Tata Motors as its earnings have been all over the place), but it's currently at a 5.5x multiple, a 175% premium over its historical average. 

Maruti, on the other hand, trades at a price-to-book value consistent with its long-term average, offering a more attractive risk-reward proposition without requiring a premium over historical valuations.

In summary, while both Tata Motors and Maruti Suzuki have their strengths, from a risk-reward perspective, Maruti Suzuki appears to offer a more balanced investment opportunity at current prices. 

Investors should weigh how much future potential is already reflected in stock prices and consider the risk of overpaying for anticipated growth, keeping in mind that even slight disappointments can lead to significant price corrections.

Happy Investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com

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