IGI Logo

Buy Tata Motors Ltd For Target Rs.355

India biz: cyclical upturn, new products and cost savings to drive earnings performance

We attended TTMT’s India business analyst meet.

Key takeaways:

* Domestic CV industry volumes are expected to turn around with 36-38% growth in FY22 on better macros, government thrust on infra spending, pick-up in replacement demand and possible announcement of the scrappage policy with good incentives. TTMT is working toward strengthening its position, driven by product launches, network expansion and focused market activities. Our FY22E domestic CV volume growth estimate for TTMT stands at 36%.

* TTMT’s PV market share increased to 7.8% in 9MFY21 from a low of 4.8% in FY20. Management expects the share to increase to double-digits, driven by new products, network expansion and focused marketing activities. Recently, the Safari mid-size SUV has been launched, and another product Hornbill micro SUV is expected to be launched in FY22E. These launches would cover ~75% of the addressable PV market vs. 60% currently. The distribution network will be expanded by 150-200 outlets/year. We estimate 35% growth in TTMT’s domestic PV volumes in FY22E.

* In PVs, electrification remains a focus area and two more product launches are expected in FY22E. TTMT derives 2% of volumes from EVs currently, but expects to increase this share to ~15% over the next 3-4 years on improving affordability, increase in number of models and the expansion of charging infrastructure.

* In the near term, gross margin is expected to remain under pressure due to increasing commodity prices. To offset the impact, the company is working on cost savings, product mix premiumization and price increases. It has taken price increases in H2FY21, and more price increases are expected in the subsequent quarter.

* EBITDA margin is expected to increase to double-digits in CVs and high-single digits in PVs by FY23E, supported by better scale, improving product mix and cost savings. We estimate FY23E EBITDA margin at 10%, factoring in double-digit margin in CVs and high-single digit margin in PVs.

* Capex is expected at Rs18.5bn in FY21. Over the long term, CV capex is expected at 3-4% of revenues and PV capex is expected at 5-6% of revenues. In PVs, EV-related capex would be part of overall capex and not significant, as existing vehicle platforms such as Alfa and Omega are EV-compliant, and the company would leverage eco-system provided by group companies.

* TTMT is targeting to reach almost zero consolidated net-automotive debt by FY24 on positive FCFs, divestments and equity infusion. Positive FCFs are being witnessed in the CV division and FCF breakeven is expected in PV division by FY23E. We estimate net debt-to-equity to improve in standalone biz/JLR from 1.2x/0.3x in FY21E to 0.7x/0.2x in FY23E.

* We rate TTMT as a high-conviction Buy with a TP of Rs355, based on an EV/EBITDA of 2x/11x on JLR/standalone estimates on FY23E and the value of investments at Rs55/share. We remain positive on expectations of sales cycle recovery in JLR/India divisions, strong profitability growth on better scale/cost savings and de-leveraging efforts through FCFs/divestments.

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer