Indian Reservations (TTM)

I've always been suspicious of hype; it so rarely comes to pass. Two decades ago, Brazil and Argentina were set to conquer the world, challenging the United States and its Western allies as economic powerhouses. Today, the putative challengers are India and China.

Color me suspicious: Countries subject to avian flu, SARS, and poverty that grinds the spirit out of every living thing it encounters still has a ways to go to reach Western standards.

Bombay or Bust
That said, pockets of opportunity exist. Consider India, which has turned into a hub for lesser software technology. Companies such as Infosys Technologies (Nasdaq: INFY), Wipro (NYSE: WIT), and Satyam Computer Services (NYSE: SAY) have succeeded in competing outside of third-world confines.

But I am no fan of technology; I don't like the insatiable demand for R&D spending. Besides, there is something unsettling about the possibility - as faint as it might be - some precocious 19-year-old could render your technology obsolete.

I prefer the tactile - products that provide a more formidable barrier to entry. In India, Tata Motors fits the bill. The company is the country's largest commercial vehicle maker - the Tata logo adorns buses, dump trucks, ambulances, and cement mixers.

And soon it will adorn the world's cheapest production car. Tata is developing four-passenger vehicle - fitted with a 600cc engine - it aims to sell for about $2,500. Though Tata says it has no plans to export the new mini beyond developing countries, it could leverage what it learns from designing, producing, and profitably selling the car to other markets.

Small but Growing
By automotive standards, Tata is small potatoes. In the quarter ending December 2006, the company earned $116 million on revenue of $1.55 billion, helped by a 28 percent jump in vehicle sales. In comparison, General Motor's (NYSE: GM) and Ford's (NYSE: F) revenues are nearly 20 times greater.

Okay, I know what you're thinking: At least Tata makes money. And right you are. In fact, in the past three years, earnings have grown 73% while revenue has grown 37%. What's more, the income isn't an accounting fiction: Free cash flow increased from $9.3 million in 2002 to $55.9 million in 2006.

Of course, there is always the chance a monkey wrench could be thrown in the gears. Most of India's business growth is tied to economic growth, which, in turn, is subject to central bank machinations. On that front, the Reserve Bank of India recently hiked the cash reserve ratio, which prescribes how much of customers' deposits banks must keep on hand as cash, by 50 basis points to 6.5%, effective April 28, to fight inflation. This is the third time since December the bank has increased the ratio.

The Reserve Bank of India's preemptive anti-inflation strike is expected to slow GDP to around 7.5%.


Nevertheless, I expect Tata sales to chug along 30% higher this year and 15% in 2008, driven by increased demand for commercial vehicles and passenger cars in India and growth in exports to other developing markets. Based on those projections, earnings per ADS should grow to $1.35 and $1.55, respectively, assuming the U.S. dollar holds at around 43 Indian rupees

Relative Value
My 18-month target price for Tata is $22, a 37% increase from current levels, and is derived by applying a P/E multiple of 14 times to my 2008 EPS estimate. Relative to the average forecast for non-U.S. auto manufacturers, Tata is trading at a slight premium, but within its historical range.

Then again, unlike many automakers - foreign or domestic - Tata is actually generating a decent return on equity - around 20% per annum.


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