Tata Motors’ India CV business has continued to see cyclical recovery and has a positive outlook, though there are emergence of red flags in the form of higher interest rates and macro headwinds, Motilal Oswal said.
Brokerage Motilal Oswal said a strong recovery in Jaguar Land Rover (JLR), sustained resurgence of the India business and a possible monetisation of Tata Motors’ stake in Tata Technologies are three key catalysts for Tata Motors stock over the next 12 months. The brokerage has a 12-month target of Rs 540 for the Tata group stock, which suggests a 23 per cent potential upside ahead. This is higher than an average target price of Rs 520 on the stock, based on 29 recent analyst recommendations, as per data publicly available with Trendlyne.
Motilal Oswal said improving chip supplies globally, along with a very strong order book, should bode well for JLR. This, it said, would be supplemented by a substantially favourable mix in favour of its three most profitable products (74 per cent of order book) and operating leverage benefit.
“In turn, improving supplies would further aid the release of working capital and enable substantial net debt reduction by FY25E to less than 1 billion British pound from 3.85 billion pound in December 2022.
Tata Technologies IPO
Motilal Oswal Securities expects the IPO may add Rs 25-45 per share to Tata Motors’ sum-of-the-parts valuation (SoTP). Tata Technologies, a 74.4 per cent subsidiary of Tata Motors, is a global leader in the ER&D segment with focus on the automotive industry. In FY22, it had consolidated revenues of Rs 3530 crore and a PAT of Rs 440 crore. Of this, it derived Rs 1,200 crore or 34 per cent of revenues from the TTMT group.
“Tata Technologies is evaluating a possible IPO, which will help Tata Motors monetise part of its stake. Based on a media article, the value of Tata Technologies works out between Rs 16,000 crore and Rs 20,000. This implies Rs 25-47 per share (at 20 per cent holdco discount) for Tata Motors. However, it has not yet factored in our SoTP-based target price. This possible IPO along with the receipt of consideration of EV deal with TPG will support FCF generation from the India business to attain near debt zero in the India business,” Motilal Oswal said.
Improved JLR supplies
Chip supplies have been gradually improving over the last few months, said Motilal Oswal Securities. This is reflected in Q3FY23 wholesales (ex-JV), which were highest since chip supplies aggravated from Q2FY22, it said.
Demand for PVs in general and JLR products, in particular, remain strong in key markets globally, though the macro environment is not supportive. JLR is witnessing the benefit of full upgrades of its most important and profitable products, viz Range Rover (RR), Range Rover Sport (RRS), and Defender, leading to a substantial increase in order book, Motilal Oswal said.
“With visibility of supplies improving gradually, further improvement in mix and favorable Fx, we expect a sharp improvement in financial performance in JLR at profitability, cash flow, and debt level. We estimate JLRs FY24 wholesales (ex JV) growth of 27 per cent YoY to 3,94,000 (or 98,000 per quarter), and FY25 volume growth of 7 per cent to 4,17,000 units. This translates to EBIT margins improving to 5.6 per cent/5.8 per cent in FY24E/FY25E (vs 1.9 per cent in FY23E), respectively. This coupled with normalisation of working capital, despite an increase in capex, should result in FCF generation of 1.4 billion pound per annum, resulting in net debt reducing to less than 1 billion pound by March 2025,” Motilal Oswal said.
India CV strategic shift
Tata Motors’ India CV business has continued to see cyclical recovery and has a positive outlook, though there are emergence of red flags in the form of higher interest rates and macro headwinds, Motilal Oswal said.
“More importantly, the management has made a strategic shift by moving to demand-pull model with the objective of restoring its double-digit margins. It has started to reduce discount from September 2022 and the benefit of which was already reflected in Q3FY23 results. This had led to an upgrade of 20 per cent in our estimates for CV business profits, post 3QFY23 results,” Motilal Oswal said.
The domestic brokerage said that domestic PV business, which benefitted substantially from favorable product lifecycle, has been outperforming domestic PV market with 67 per cent/63 per cent YoY growth in FY22/FY23 YTD, respectively, resulting in an improvement in market share to 14.2 per cent in FY23YTD against 8.3 per cent in FY21 and 5 per cent in FY20.
“With no major new launches lined up for Tata Motors and some of its key competitors benefitting from a favorable product lifecycle, we believe Tata Motors’ market share has peaked out for the next 12-15 months. It would be launching Curvv (mid-sized SUV expected in CY24), Harrier EV (CY24), Sierra EV (e-SUV in CY25), and Avinya (first born EV in CY25),” it said.
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