STOCK MKT: Tata: The ‘Rs 1 lakh’ question

A few years ago, Tata Motors took a bold turn to diversify into passenger cars. The stakes in its Rs 1 lakh car, scheduled to be launched by mid-2008, might not be as high as they were back then, but they do have the ability to steer the company on to a higher profit trajectory and a higher market share. The call on the small car project is essentially the call to make on Tata Motors today.

If the car is a success, it can do wonders to Tata Motors’ numbers. But if it doesn’t capture the numbers, the company will feel the weight of the large investment it is sinking into the project. Going by the track record of the Tatas, the aggressive pricing and what the competition has under their bonnets, the odds are in favour of the Tatas.

At its current price of Rs 698, its stock trades at a PE of 13.5. Its commercial vehicles business is growing well, and cars (Indica and Indigo) is managing to weather slowdowns. Over a three-year period, the company has registered a CAGR of 27 per cent in sales and 30 per cent in net profit. That might slow a tad, but even then is a good reason to own the stock. And if the Rs 1 lakh car turns out to be a hit, so will be the stocks.