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Ropes in a private equity investor in the EV business

Valued at USD6.7-9.1b, with equity conversion in FY27 linked to then revenue

TTMT on 12th Oct’21 announced an 11-15% stake sale in its EV business to TPG Rise Climate and ADQ for INR75b. This investment would be through compulsorily convertible preference shares (CCPS), which would be converted in FY27. The valuation of CCPS would be linked to FY27 revenue from this business. While this business is still at a nascent stage, this transaction sets benchmark valuations and makes us value this business separately (unlike implicitly valued with the domestic PV business). We value this business ~USD5.4b on a DCF basis.

Contours of the deal

* TTMT and TPG Rise Climate have entered into a binding agreement, whereby TPG along with its co-investor ADQ (TPG) will invest in the soon to be incorporated electric PV business (EVCo) of TTMT.

* TPG will invest INR75b in CCPS to secure between 11% to 15% stake, implying an equity value of USD6.7-9.1b.

* This investment will be in two equal tranches – first tranche by Mar’22 (post the formation of an EV subsidiary) and the balance by CY22-end (on the operationalization of the subsidiary).

* This CCPS would be converted into equity of the EVCo on achievement of certain revenue thresholds by FY27. In the interim, CCPS will have a negligible coupon.

* EVCo will be created as an asset-light new subsidiary of TTMT and will house all dedicated EV talent and design capabilities. No assets and liabilities from the PVCo will be transferred to the EVCo.

* EVCo plans to invest in excess INR160b over the next five years in products, platforms, drive trains, dedicated EV manufacturing, charging infrastructure, and advanced technologies.

* EVCo would leverage all existing investments in technologies, brands, manufacturing capacities, and sales network of ICE PV business (PVCo). The latter will act as a contract manufacturer, and provider of services, enabling minimal duplication, while accelerating speed to the market.

Insights from the management interaction

* EVCo valuations have been pegged with valuations of pure EV players globally. Valuations for the EVCo compares favorably with East Asian peers.

* Over the next five years, it expects EV penetration to be in double-digits for the industry. For TTMT, EVs would constitute over 20% of its PV business, driven by 10 EV product launches.

* The management expects EVCo to be breakeven at the EBITDA level in FY23E.

* While it has an investment plan of USD2.2b over a five year period, it currently has no plan for further fund raising in the foreseeable future, and the current dilution is sufficient for existing plans.

* TTMT’s strategy for EV products initially focuses on converting ICE vehicles to EV (compromises on range), followed by adapting some of the platforms to a multienergy platform, and finally having a ‘Born EV’ platform. It is considering a dedicated (or born) EV product in its next seven products.

* While the conversion of CCPS is set for FY27, if it does a raise funds earlier, then there will be a conversion on that basis.

* Valuations and resultant stake for TPG is linked to FY27 revenue. If EVCo doesn't meet the revenue thresholds, TPG’s stake will be capped at 15%.

* All other electric businesses like e-LCVs, e-Buses, etc. will stay in the standalone entity.

* Post this fund infusion, the management is not aggressively scouting for a partner in the PVCo.

* It would approach the PLI scheme for Auto at the TTMT group level as investments in the ICE business are also eligible. The payoffs of incentive can happen at the business level.

Our view and valuations

* Earlier, we were valuing the India business at an aggregate level at 12x EV/EBITDA basis, which implied a value of USD4b for the overall PV business. Considering the e-PV business was loss-making at the operating level, it implied zero value in our SoTP valuation.

* While this business is still at a nascent stage, this transaction sets benchmark valuations and makes us value this business separately (unlike implicitly valued with the domestic PV business).

* We now value key components of the India business separately. We value this EV business ~USD5.4b on a DCF basis, or ~INR90/share. Even if we benchmark EVCo valuations to the deal valuations of USD6.7b (at the lower band), considering equity conversion is planned for FY27, we would discount back the deal valuation to Sep’23E (our TP date). This implies INR80/share for the EVCo.

* On the other hand, we lower our target multiple for the PV business to 10x from 12x as any increase in the value of the EV business has a negative connotation for the ICE PV business, though at an overall PV business level TTMT may benefit from EVs.

* Recovery is underway in all of the three businesses of TTMT. While the India CV business would see a cyclical recovery, the India PV business would witness a structural recovery. JLR is witnessing a cyclical recovery, supported by a favorable product mix. However, supply-side issues would defer the recovery process.

* The stock trades at 12x FY23E P/E, 3.8x EV/EBITDA, and 2.3x P/BV. We maintain our Buy rating with a TP of ~INR560/share (Sep’23E-based SoTP).

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