Reports suggest that Tata Motors is in talks with a local manufacturer � Iran Khodro Company, to set up a joint venture for assembling its petrol cars in Iran. Under the agreement, kit-versions of the cars will be imported and assembled at Iran Khodro�s manufacturing facility after adding local content such as tires and batteries. The country, which has just emerged from sanctions, holds huge potential for the automotive industry.

At its peak in 2011, Iran ranked the 11th largest automotive market in the world with nearly 1.7 million vehicles (including commercial vehicles) sold. With the sanctions now being lifted, the automotive market in Iran is being pegged at 2 to 3 million vehicles annually, given the pent up demand. Tata Motors� venture in this region should allow the company to tap into this huge market and generate higher revenues in future.
Pent Up Demand, Aging Vehicles Make Iran A Lucrative Market


While the importation of vehicles was restricted when the country was under sanctions, Iran now has a huge pent up demand for automobiles, given the country�s population size and an estimate of just 80-100 cars per 1,000 people. Further, it is estimated that out of the 16.8 million light vehicles in the country around 2.5 million are over 20 years old, indicating the need for replacement. This makes Iran a lucrative market for car manufacturers.

Tata Motors plans to sell 100,000 cars in the region to start with and production will be ramped up gradually. Production at the factory, which may be located in suburban Tehran and Masad, is slated to begin in 2018. The company plans to use Iran Khodro�s sales network to sell the cars under its own branding.

According to our estimates, Tata and other vehicles account for less than 10% of Tata Motor�s valuation, hence revenues of this division do not impact the valuation of the company significantly.

Iran Khudro is an established player in the region and commands a54% share in Iran�s market. In January 2016, it entered into a joint venture to PSA to produce 20,000 cars annually including the Peugeot 208, 2008 and 301 models.

Iran was Peugeot�s second largest market before the French automaker had left the country. Tata Motor�s association with an established player in the region should benefit the company. We believe Iran holds a strong potential for Tata Motors and the company should get a boost in its revenues by establishing itself in the region.

However, given that Land Rover and Jaguar are the most important divisions for the company, with Tata vehicles accounting for a small portion of its valuation, success in Iran will not impact the company�s valuation significantly in the short term.

By Forbes