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Buy Tata Motors Ltd For Target Rs.515

TPG deal unlocks unseen value

* TTMT has announced that TPG Rise Climate (TPG) will invest $1bn, in a wholly owned subsidiary proposed to be incorporated to undertake the passenger electric mobility business (EVCo). TPG’s investment would be for an 11% to 15% stake at a post-money valuation of $6.7bn to $9.1bn. The 11-15% stake would depend on revenue achievements by FY27. TPG would be the lead investor, and Abu Dhabi Developmental Holding Company (ADQ) would be the co-investor.

* Electric mobility division (EVCo): TTMT’s E-PV volume stood at 4,218 units, with a 71% market share in FY21. Management expects E-PV penetration to be 10%+ for the industry and 20%+ for TTMT in the next five years. Management has guided for EBITDA breakeven by next year, and expects to turn cash positive after next 3-4 years of investment phase.

* EVCo’s agreements with PV division: EVCo will house all dedicated EV talent and design capabilities. It will leverage TTMT’s all existing investments in technologies, brands, manufacturing capacities and sales network for PVs. It will have three transaction agreements with the PV division: 1) Toll manufacturing arrangement for accessing manufacturing facility; 2) Royalty agreement for brands/IP usage; and 3) Shared services agreement. All transactions would be at arm’s length basis.

* EVCo’s business requirements: EVCo plans to expand the product portfolio from current 3 models to 10 models by FY26. Next seven models would be based on adaptive platforms and born platforms. It will also invest in EV manufacturing, charging infra, drive trains, component localization and platforms. All this would require cumulative investments in excess of $2bn (Rs160bn) by FY26. TPG would provide $0.5bn by Mar’22 after setting up EVCo and the balance $0.5bn by Q3CY22 when the company systems would be ready to recognize revenues. EVCo may look at raising another $1bn from investors at a later date.

* The investments would be through Compulsory Convertible Preference Shares at a nominal coupon rate till FY27 and it would be converted to equity shares on achieving revenue thresholds or the conversion can happen earlier, if company raises funds.

* EVCo valuations was arrived on a comparable multiple basis of East Asian and US EV companies. CY21E trailing EV/Sales for Chinese OEMs is in the range of 7-10x and for Tesla at 15x. As per our estimates, EVCo FY27E trailing EV/Sales would work out to 7x (Exhibit 4).

* India’s Tesla moment? The TPG-TTMT deal may redefine India’s auto landscape – investments of such magnitude indicate confidence about India’s future EV potential. We believe that large investments, more product options and favorable government policies will accelerate the pace of EV adoption.

* Retain Buy with a Sep’22E TP of Rs515 (Rs400 earlier), as we ascribe value to the India E-PV business at a pre-money valuation of Rs516bn, or Rs135/share (Exhibit 5,6). Our TP breakdown is as follows: 1) India CV business valuation at 12x EV/EBITDA (in line with Ashok Leyland’s historical valuations of 12x), or Rs167/share; 2) India PV business (excluding EV) at 5x (notable discount to Maruti Suzuki’s historical valuations of 13x, factoring in reducing share of the ICE segment in the long term), or Rs22/share; 3) India E-PV business at a pre-money valuation of Rs516bn, or Rs135/share; 4) JLR/CJLR valuation of 2x/4x EV/EBITDA or Rs155/share; and 5) Other investments at Rs36/share.

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