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Tata Motors Ltd: Steam left?

Company Name – Tata Motors Ltd (Tata Motors)

Current Share Price – INR 450 (July 29, 2022)

Market Cap – INR 160,568 cr


1. What is interesting about the stock?

Tata Motors is a household name with TATA trucks and buses spotted and used at least a few times by most Indians. Part of one of the most trusted business groups, Tata Motors is the leader in the commercial vehicle segment in India. It also has a presence in the passenger vehicle (cars, SUVs) segment although it had been a laggard with uninteresting models and quality/reliability issues. Not very widely known is that it also owns two iconic brands, Jaguar and Land Rover (JLR business) which came with the legacy acquisition more than a decade back.

The next few years seem strong for Tata Motors' domestic business aided by broader economic growth as well as conscious actions by management. Read on for the details.

Strong outlook for commercial vehicle (trucks) business in India

  1. The domestic commercial vehicle (CV) business is well set for a strong revival post the sharp down-cycle in past few years. FY21 MHCV industry volumes stand at the lowest in the past 18 years and were 60% below the recent peak in FY19. In fact, including scrappage of trucks as per regulation, the overall on-ground fleet contracted in FY21.

  2. As the economy opens up and activity continues to improve, demand for CVs is likely to jump. FY22-24 should see a volume CAGR of 30%/20% for medium/light CVs. Volume run rate in Nov-21 stood at 266,000 annualized compared to 160,000 vehicles sold in FY21. Over the medium to longer-term, freight traffic growth and hence the demand for CVs is linked to GDP growth and this should be a key driver for Tata Motors.

  3. Tata Motors, with a strong product portfolio and distribution/service network, enjoys ~55% market share in MHCVs and ~50% market share in LCVs. Hence would be a key beneficiary of the volume uptick. The recent uptick in market share further adds to conviction on faster growth than the market. Tata Motors' volume jumped more than 100% in Q1FY23 on a QoQ basis.

Gaining back the mojo in passenger vehicles (cars and SUVs)

  1. The Indian passenger vehicle industry has suffered due to global chip shortages even as end demand has held up well. Waiting periods for cars are long and manufacturers have healthy order books. As chip supply continues to improve, volumes should grow fast on a low base.

  2. Over the past few years, Tata Motors has dramatically overhauled the domestic passenger car and SUV offering with new models across segments that exude better quality, trendy designs, and better reliability. And the new portfolio has been well received by consumers as reflected in market share improving from 5% in FY20 to ~12% in FY22. This also drove improvement in profitability since FY21 vs loss in FY20. EBITDA margin of the business improved from 2% in FY21 to 5.3% in FY22 (6.1% in Q1FY23).

An early mover in the domestic EV business with a 70% market share

  1. The key risk which has plagued auto stocks is the emergence of Electric vehicles and the likely negative impact on traditional vehicle manufacturers. But even as the domestic electric vehicle industry is very nascent (approximately 0.5% penetration), Tata Motors has been an early mover and has scaled up well with a strong suit of products at competitive prices. Tata Motors dominates the business with a 70% market share.

  2. Key products here include Tigor EV (306km range) and Nexon EV (312km range) sold across 60 cities from 150 touch points. This is supported by public charging network of 700+ chargers across India, 150+ private charging points, and 7000+ slow AC chargers

  3. The company has recently announced an investment of USD 1 bn by TPG for an 11-15% stake in the EV subsidiary implying a valuation of USD 6.5-9bn setting a healthy benchmark for valuation for Tata Motors' stake.

JLR business seeing headwinds from chip shortage, China shutdowns, and recessionary pressure in Europe

  1. As in India, JLR volumes too have seen the impact of chip shortages which should normalize gradually. Commentary across players suggests the situation is improving.

  2. China lockdown has impacted volumes in Q1FY23; we need to watch out for the potential impact of recessionary pressure in Europe

  3. JLR has a strong order book for passenger vehicles (more than 3 months) and also has low inventory levels with its dealers. Hence amid the relatively healthy end-user demand, volume growth should be healthy.

  4. New product launches – Range Rover and Range Rover Sport have had slower than expected ramp-up.

  5. EBITDA margin fell to 6.3% in Q1FY23 vs 9% in Q1FY22 with ~11% dip in revenue

Tata Motors India's business volume has been robust for Q1FY23 with 101% growth on a YoY basis (marginally down on a QoQ basis). Total sales for CV in Q1FY23, including trucks and buses, stood at ~100,000 units, compared to ~50,000 units in Q1FY22. Domestic passenger vehicle sales are up ~100% YoY to 130,000 in Q1FY23 when compared with 64,000 units sold in Q1FY22.

JLR business contributes 60-65% of revenue & EBITDA and around 50-55% of the Enterprise Value. JLR business faced challenges in Q1FY23 with a volume fall of ~37% on a YoY basis.

2. Key Historical Financials

  • Revenue grew 11% in FY22 on a YoY basis but is still lower than FY19 revenue. Revenue increased 8% in Q1FY23

  • EBITDA margin fell in FY22 to 9% vs 13% in FY21 due to higher commodity prices and supply chain challenges. Margin continued to fall in Q1FY23 to 3% driven by JLR business

  • CFO in FY22 was down 50% vs FY21. FCF outflow of ~ INR 10,000 cr in Q1FY23!!!!

  • Company continues to make losses on net profit level with an increasing debt level

3. What is my view on company valuation?

Tata Motors is currently trading at an EV/EBITDA multiple of 11x. Using the sum-of-parts valuation, with JLR business at 6.5x (Mercedes and Volkswagen-Audi trade between 6-7x on EV/EBITDA), India business at 10x, and EV business at TPG entry price, the current valuation seems to be slightly overvalued.

The stock has already run up more than 3x in the last 3 years on the back of expectations of improved performance but has fallen ~10% from December 2021.

Company could face challenges in the next couple of years from the zero COVID policy in China & recessionary fears in Europe both impacting JLR business and increasing the interest rate environment in India. Investors should watch out for these risks and evaluate investing at lower levels.

4. What are the risks to the investment analysis?

Risks to the analysis are:

  • The turnaround in the business is needed as the Company has been making consistent losses since FY19

  • Both CV and JLR businesses are cyclical - problems have increased due to the China lockdown and the Russia-Ukraine war


About the Author

I have over 14 years of experience in equities with a detailed focus on industrials, infra, and metals/mining. I am an engineer and an MBA from a premier institute in India.


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.

I am not a SEBI registered advisor. This article is purely for educational purposes and not to be construed as investment advice. Please consult your financial advisor before acting on it.

I have used publicly available information while writing this article.



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