Tata Motors: Ride the uptick

Updated: Feb 15


Company Name – Tata Motors Limited (Tata Motors)


Current Share Price – INR 476 (December 29, 2021)


Market Cap – INR 169,922 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 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.


Next few years seem strong for all businesses under Tata Motors 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 was 60% below the recent peak in FY19. In fact including scrappage of trucks as per regulation, 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 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 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 50%+ market share in MHCVs and ~40% market share in LCVs. Hence would be a key beneficiary of the volume uptick. Recent uptick in market share further adds to conviction on faster growth than market.


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

  1. The Indian passenger vehicle industry has suffered due to global chip shortage even as end demand has held up well. Waiting periods for cars is 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 which 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 11% in first half of FY22. This also drove improvement in profitability since FY21 vs loss in FY20.

Early mover in domestic EV business with 70% market share

  1. Key risk which has plagued auto stocks is emergence of Electric vehicles and 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 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 investment of USD 1bn by TPG for 11-15% stake in EV subsidiary implying valuation of USD 6.5-9bn setting a healthy benchmark for valuation for Tata Motors' stake.

JLR set to see healthy volumes post chip shortage

  1. As in India, JLR volumes too have seen impact of chip shortages which should normalize gradually. Commentary across players suggests last reported quarter was the worst and supplies are improving.

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

  3. New product launches – Range Rover and Range Rover Sport will add additional volumes and support profitability too.

2. Key Historical Financials

Overall Company should see strong cash generation: Combined with strong revenue growth and better profitability, moderation in capital expenditure is expected to drive strong cash generation over FY23-24. This should help company become debt free in 2.5 years compared to current debt of INR 64,000 cr. This will directly support value of equity and hence market cap and stock price.


3. What is my view on company valuation?


Current valuations at 10x FY23 PE and 4.7x FY23 EV/EBITDA (based on my projections) are much cheaper than peers, both in PV space as well as direct competitor like Ashok Leyland. While exposure to developed markets through JLR warrants this, discount is still large. Incorporating value of India business at 11x EV/EBITDA, JLR at 3x EV/EBITDA and value of EV subsidiary we can see ~20% upside.


Stock has already run up more than 100% in last one year on the back of expectations of improved performance. Investors should evaluate the Company for long term investment perspective.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • Turnaround in the business as the Company has been making consistent losses since FY19

  • Both CV and JLR businesses are cyclical in nature

  • Company has lost market share in PV business with limited success in new launches - will this change with new launches esp EV?

 

About the Author


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


Disclosure


I have no stock, option or similar derivative position in any of the companies mentioned since 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 purpose and not to be construed as an 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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