Quotational Loss = Buying Opportunity?

Quotational loss in a stock offers an excellent buying opportunity due to a unilateral lowering of valuations, provided the franchise is excellent and the underlying value remains broadly intact.

While this statement makes absolute sense, however, I was appalled when one of the market veterans referred Tata Motors as having a huge franchise and that it is suffering from a quotational loss, (considering its market capitalization fell by 37% between December 2017 to July 2018) and that its value will come back, since Tata Motors has become very aggressive in the recent past to gain market share.

While I do not have powers to predict that the value of the stock would come back, for all that you know, it might come back; however, the company being referred to as “huge franchise” seems to be a gross mistake.

Few pointers:

  • While the domestic operations continue to incur losses, on a consolidated level (including JLR), the company has been showing increasing profitability. However, profitability has not resulted in conversion into cash flows for the equity holders since the last 12 years.
  • With the company’s net debt on March 31, 2018 at INR 40,000 crores approximately; cash flow to debt holders (CFD) every year would work out to INR 6,400 crores every year on very conservative estimates of 6% interest rate and with 10% of the loan getting repaid every year. Any increase in interest rate or repayment of time-period would result in disastrous consequences for the equity holders. Just to add, while, the company’s Free cash flow became positive for the first time in 5 years, approximately INR 1,300 crores, this cash flow is prior to payment to the debt and equity holders.
  • Tata Sons’ Chairman spelt out very clearly that every single car in the company is losing money. “In passenger cars, our cost structures are out of whack. Every single car and model is losing money. It’s important to pick up volumes and try to become profitable”. Where will the volumes come from? None of its previous launches have created any meaningful impact. Apart from Nano, which was a colossal failure, none of its other vehicles have attained any mass appeal till date.
  • Gaining market share at the cost of profitability is a cardinal sin; it’s only the customer which enjoys the proceeds, but nothing flows into the company.
  • 90% of the revenues and entire profitability of the company comes from JLR. Since it is a discretionary spend item, the company’s performance would continue to remain volatile at best, drawn more towards value-for-money vehicles, which is clearly not the company’s forte.

Considering some of these above, I would refrain from catching the “falling knife”, unless it really starts building a franchise. After all, I would not buy a dilapidated house, just because it is available cheap. Would you?

Disclaimer: Please note that these are my personal views. I am NOT a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014. All investors are advised to conduct their own independent research into individual stocks before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action.

 

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