Tata Group Stocks Are Hot. Here Are The Ones To Avoid...

Tatas and Trust go together. When we think about large, reputed business groups that have survived a century, the first name that comes to mind is Tata.

The group is currently readying itself for the next decade by investing heavily in new growth sectors and also readying IPOs of Tata Technologies and Tata Electronics.

These IPOs coming up in the market could possibly change the market sentiment…

While many of their stocks have performed well on the bourses, it's important to also be aware of the ones that may not be as strong as others when looked at from an investment perspective.

In today's article, we will be discussing the Tata Group stocks that investors may want to avoid.

These companies have seen a degrowth in sales and have reported huge losses in recent financial years.

#1 Artson Engineering

First on the list is Artson Engineering, a subsidiary of Tata Projects.

The company is engaged in the business of design, engineering, procurement and construction for the oil & gas and hydrocarbon industry.

It manufactures bulk liquid storage tanks, various kinds of heat exchangers, pressure vessels, columns & process equipment, etc.

Artson's strong linkages with its parent company Tata Projects has helped it secure orders and grow its revenue over the years.

However, post-Covid, the company's performance was affected. In the last three years, its revenue grew marginally by 0.8% on a CAGR (compound annual growth rate) basis. The net loss expanded from Rs 7 million (m) to Rs 50 m during the same time due to high commodity prices.

Its debt metrics have also  raised concerns, with the debt-to-equity ratio coming in at 13.9x for financial year 2022, as against 3.5x two years ago. Additionally, liquidity position worsened over the years, and currently, the interest coverage ratio stands at 0.6x, as against 1.6x two years ago.

To help maintain liquidity, Tata Projects has extended its support to the company and infused capital of Rs 12 billion (bn) in financial year 2022.

In the December 2022 quarter, the company's revenue fell by 27% year on year (YoY), while losses came in at Rs 20 m.

Currently, Artson Engineering is embarking on a drive to upgrade its manufacturing facilities to increase its market share and retain the competitive advantage.

At the end of the financial year 2022, the company had an unexecuted order book of Rs 2 bn. If it manages timely execution for these, the company may grow its revenue at a stronger rate.

Artson Engineering Share Price – 1 Year Performance

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#2 Oriental Hotels

Second on the list is Oriental Hotels.

The company has a portfolio of seven hotels, which operate under the brand name of its parent company, Indian Hotels.

Ever since the pandemic struck the world, the company has been facing difficulty in running its business. Despite revenge travel, the company is unable to get back to pre-Covid levels.

In the last three years, its revenue declined at a CAGR of 8.8% due to lower occupancy. The net loss also widened from Rs 66 m in the financial year 2020 to Rs 128 m in the financial year 2022.

To add to this, the company has a high level of debt when compared to its scale of operations. Its long-term debt at the end of the financial year 2022 was Rs 2.3 bn, up by 24% in the last three years, driven by debt-funded capex.

The company's interest coverage ratio has also worsened from 4.7x to 0.2x in the last three years.

With travelling picking up pace again, the company sighted a relief as its revenue grew by 71.6% YoY in the September 2022 quarter. It also reported a profit of Rs 111 m as against a loss of Rs 48 m the previous year, driven by cost-cutting initiatives.

This is also reflected in its performance on the exchanges. Shares of Oriental Hotels have zoomed by over 40% in the last one year.

Oriental Hotels Share Price – 1 Year Performance

The company plans to spend Rs 650 m on capex in the next two years to expand its inventory, which it is funding entirely through internal accruals.

Going forward, growth in travel is expected to drive revenue and profit growth.

It remains to be seen whether the company's growth momentum will continue despite a looming threat of recession.

#3 Automobile Corporation of Goa

Next on the list is the Automobile Corporation of Goa, a company jointly promoted by Tata Motors and EDC Limited.

It manufactures and assembles bus coaches and sheet metal components for automobiles.

The company has five manufacturing facilities in Goa, Pune, and Karnataka, with a bus-building capacity of 10,000 buses per annum.

Being a part of the auto sector, the company is exposed to the cyclicality of the industry, which is dependent on the growth of the Indian economy.

Post Covid, the company's revenue took a hit and declined at a CAGR of 5.6% in the last three years. This was due to lower volumes driven by unfavourable macroeconomic conditions and challenges pertaining to BS-VI/axle load norms.

The net profit also fell from Rs 100 m to Rs 34 m in the financial year 2022.

As a result, its liquidity also reduced drastically. The company's interest coverage ratio was 221x in the financial year 2019, which fell to 36.6x in 2022.

To add to this, the promoters have reduced their shareholding by 7%, making investors doubt the company's future.

One good thing is that the company remained debt-free. Otherwise, declining revenue and profits would have affected its credit profile.

In the September 2022 quarter, the company's revenue grew at 157% YoY, driven by an increase in volumes due to higher economic activity. The company also reported a net profit of Rs 77 m against a loss of Rs 16 m the previous year.

Going forward, Automobile Corporation of Goa is planning to diversify its product line by adding new models to its existing portfolio. It is also planning to enter the electric vehicle (EV) segment by manufacturing the body for electric buses. This could be a gamechanger.

#4 Benares Hotels

Fourth on this list is another company from the hotel industry, Benares Hotels.

Benares Hotels is a subsidiary of the Indian Hotels Company. It operates four hotels in India, of which two are in the name of Taj, the world's strongest hotel brand.

The company fell prey to the pandemic, and its revenue decreased at a CAGR of 7.8% in the last three years.

The net profit also reduced by half from Rs 106 m in the financial year 2020 to Rs 57 m in 2022.

However, the business was quick to recover when the economy started opening up.

In the September 2022 quarter, the company's revenue grew by 71% YoY on the back of revenge travel picking pace. Net profit also grew by a whopping 500% YoY.

All this was well accounted for by the market as shares soared by over 190% in the last one year.

Benares Hotels Share Price – 1 Year Performance

Although the company's revenue and profit grew at a high rate, they still aren't close to pre-Covid levels.

Also, the company hasn't announced any growth plans to expand its portfolio. This at a time when major hotel companies have laid out big growth plans.

#5 TRF

Last on the list is TRF.

The company is engaged in the business of manufacturing material handling equipment. It specialises in designing and manufacturing various products, including wagon tipplers, stacker reclaimers, and crushers.

The company majorly earns its revenue from orders received from Tata Steel.

In the last three years, the company's revenue fell at a CAGR of 17.4%, owing to low orders from Tata Steel and due to the pandemic.

The net loss, however, reduced to Rs 161 m, as against Rs 1,850 m in the financial year 2020, due to lower interest costs as the company paid off most of its obligations with the money infused by its parent company, Tata Steel.

However, it has a negative net worth indicating a weak capital structure. Moreover, it has a low-interest coverage ratio of 0.5x, indicating low liquidity.

In the September 2022 quarter, the company's revenue grew by 290% YoY, primarily due to an increase in other income. It also reported a net profit of Rs 479 m as against a loss of Rs 129 m the previous year.

Recently, Tata Steel announced the amalgamation of seven companies into itself, including TRF. This amalgamation will take a year, after which shares of TRF will extinguish, and each TRF shareholder will receive 17 shares of Tata Steel for ten shares of TRF.

Going forward, the amalgamation would help Tata Steel benefit from operational synergies and reduce administrative costs.

TRF Share Price – 1-Year Performance

Investment takeaway

Although the Tata Group has always remained at the forefront of innovation and the India growth story, it does not mean Tata stocks aren't vulnerable to macroeconomic conditions.

You should treat them like any other company when considering them from an investment perspective.

Remember, a fundamentally strong company has the potential to give good returns in the long run. Hence, it is better to carry out proper due diligence before investing in any stocks, including Tata group companies.

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