Tata Motors (NYSE:TTM) is arguably one of the best-known Indian companies, due in no small part to the fact that it is was among the first Indian companies to list on a U.S. exchange. What's more, analysts and investors have long been excited by the potential of selling cars and trucks to such a large and growing economy.

While that all sounds good, the year-to-year reality has been more challenging. Due in part to poor designs, questionable customer experiences, and inefficient infrastructure, Tata has had considerable challenges in its domestic passenger vehicle business, while the commercial vehicle business has struggled in the face of tougher economic conditions. That leaves the company even more dependent upon Jaguar Land Rover – a growing luxury brand with good exposure to China as well as recovering markets in North America and Europe. Many of the metrics for Tata Motors suggest undervaluation, but a long-term cash flow analysis suggests that investors may still be expecting more than this company can deliver for the long term.

JLR Driving the Business
Virtually from the moment Tata bought Jaguar and Land Rover from Ford (NYSE:F) in 2008, creating Jaguar Land Rover Automotive PLC (JLC), this unit has been a significant part of the company's overall business. That has become only more true given JLR's success and the struggles of Tata's domestic vehicles business. As of the fiscal first quarter (the June quarter of 2013), JLR made up about 80% of the company's sales and about 98% of the company's EBITDA.

The good news is that JLR only appears to be getting stronger. Not only is JLR gaining share in China against rivals like BMW (Nasdaq: BAMXY), Audi (part of the Volkswagen (Nasdaq: VLKAY) conglomerate), and Mercedes (owned by Daimler (Nasdaq: DDAIY), but the brands are doing well in North America and Europe as well despite the ongoing economic challenges there. Better still, a drive to consolidate platforms and improve parts-sharing could improve margins into the high teens.

Can the Company Execute a Domestic Turnaround?
While Tata Motors once had an exciting domestic business, the company made some familiar mistakes, including over-expanding its operations and losing touch with customer preferences.

The company's commercial vehicle business remains pretty healthy with nearly 45% share of  the light vehicle market (almost double the share of Mahindra & Mahindra) and more than 60% of the medium and heavy vehicle market (well ahead of Ashok Leyland and Eicher). Tata has partnered with Cummins (NYSE:CMI) across many of its platforms and though the commercial vehicle market in India has been hit by declines in mining and construction, the long-term outlook is still healthy.

In contrast, the passenger vehicle business is in bad shape. The company's share has been weak for a while, but has fallen from about 15% in fiscal 2012 to around 6% in fiscal 2013 as rivals like Maruti and Hyundai have shot past Tata. Management is saying the right things about streamlining the supply chain, improving manufacturing, and targeting better quality and a better consumer experience. Even so, Tata has a pretty steep uphill climb to get this business to a point where it is once again a positive contributor to performance.

The Bottom Line
JLR is providing all of the growth right now, as sales were up 13% in the latest quarter and offset the 14% revenue decline in the domestic business. With JLR gaining share and just starting the process of driving even better margins through platform/parts rationalization, you could argue that simply stabilizing the domestic business would be a big improvement for Tata Motors.

My only real problem with Tata at present is that the price today seems to predict some significant improvements. Even if Tata Motors can grow revenue at a long-term rate of 10% and produce free cash flow margins in the mid-single digits (which would be very good for an auto/heavy vehicle manufacturer), it's hard to argue that the shares are worth much more than $22 today. Although the sell-side disagrees, and Tata Motors could be a good play for investors wanting to position themselves for an emerging market rebound, I think the market is already assuming quite a lot of global success for JLR, not to mention an improbable degree of recovery in the domestic vehicle business.
Disclosure: As of this writing, the author has no financial positions in any companies mentioned.

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