Tata Motors (TTMT) is a leading global automobile manufacturer with a wide range of PVs, SUVs, buses, trucks, pickups, and defense vehicles.
Motilal Oswal Financial Services has maintained 'Buy' rating on Tata Motors (TTMT) with a target price of Rs 400 per share.
Key highlights and Investment rationale
JLR’s profitability to improve, driven by market recovery and ramp-up in newly launched Defender: JLR volumes started to show early signs of recovery from 2HCY19, driven by the new Evoque, a ramp-up in I-Pace, and course correction in China- which first got derailed due to the COVID impact and remains so due to the semi-conductor shortage. While the semi-conductor shortage is impacting wholesale volumes, retail volumes are seeing good recovery in all of the key markets (reflected in the order book of over 110k units). JLR is working with the supply chain for semi-conductors to ensure improvement from 3QFY22. In the case of India, the impact is low on the CV business as use is limited and demand is also low. The PV business is impacted, particularly due to the Malaysia lockdown, with some impact to be visible over Sep-Oct’21. Additionally, JLR should benefit from the ramp-up in Defender. We expect JLR (including JV) to post a 13% volume CAGR over FY21-23E (after 13.3% CAGR decline over FY18-21). This, coupled with the possibility of mix improvement and reduced variable marketing spend, would lead to a ~15% revenue CAGR.
India business on recovery path; PV nearing cash breakeven: The India business’ recovery was severely impacted by COVID 2.0. Nonetheless, the India CV business is on a strong footing and primed for strong cyclical recovery in both M&HCV (42% CAGR over FY21-23E) and LCV (~21% CAGR). Management expects 2HFY22 to be better than 1HFY22 and momentum to be maintained over the next 2-3 years. It aspires for market share of over 50% in CVs and double-digit EBITDA margins. For M&HCV, it has gained market share in the last few quarters owing to superior SCR technology, and aspires to improve market share to 60% (from 58% currently). On the other hand, TTMT’s refreshed product portfolio would enable sustained recovery in the PV business (~34% CAGR) and market share gains as well as bring it on track to achieve FCF breakeven by FY23E. It targets 15% market share in India PV over the medium term, along with EBITDA margins in the high single digits.
Head start in EV: India PV has two platforms - viz Alpha Arc (Altroz and Punch) and Omega Arc (bigger vehicles such as Harrier and Safari)- which are scalable and can be electrified. It has a gap in 4.3mtr SUV (Creta segment), for which it needs to tweak the platform. In India PV, it has 70% market share in EVs and thus has a head start in the EV space - the competition is not as geared up. It plans to launch 1-2 EVs every year by converting existing ICEs into EVs, and would have 10 pure EVs by 2025. It aims to achieve 25% of PV volumes from EVs by 2025.
Valuation and view: Recovery is underway in all the three businesses of TTMT. While the India CV business would see cyclical recovery, the India PV business would witness structural recovery. JLR is witnessing cyclical recovery, supported by a favorable product mix. However, supply-side issues would defer the recovery process. While there would be no near-term catalysts from the JLR business, the India business (~50% of SoTP) would post continued recovery. The stock trades at 9.6x FY23E consolidated EPS and 3.2x EV/EBITDA. We maintain our Buy rating, with TP of Rs 400/share (Mar’23E SoTP based).
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