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About the stock: Tata Motors (TML) is an auto OEM from the house of Tata’s, operating in domestic (PV, CV) and global markets (Jaguar Land Rover i.e., JLR)

* JLR is a luxury car brand which includes two prominent names i.e., Jaguar (models like I-pace, etc.) & Land Rover (Defender, Range Rover, etc.)

* FY23 consolidated sales mix– JLR ~65%, India CV ~20%, India PV ~14%.

* TML India is a leader in domestic CV space with ~40% market share while is the third largest player in the PV segment with ~14% market share (FY23)

Investment Thesis

* JLR all set for record profitability and cash generation in FY24: JLR is the overseas luxury PV arm at TML and has been subject to volatile earnings and cash flow generation. With indigenous working on the product side, cost initiatives and consequent lowering of breakeven levels, JLR is onto path of healthy profitability with EBITDA margins in Q4FY23 at 14.6%. With present orderbook tilted in favour of higher profitable models and adequate price action in place, we expect EBITDA margins to improve to 15%+ levels going forward. Amidst healthy pending orderbook, JLR has guided for >4 lakh wholesale volumes for FY24E with FCF generation guidance pegged at >£2 billion amid capex outlay of £3 billion thereby aiming to reduce its net debt from ~£3 billion to <£1 billion. This is a substantially positive for TML.

* Domestic business positives retained, to build further strength: TML is the leader in domestic CV space and is benefitting from cyclical upswing in the segment amid robust infrastructure spending by the government. It is well poised for profitable growth with capabilities showcased across powertrains (ICE, CNG, Electric, Hydrogen, etc.) and guidance for double digit EBITDA margins amid pricing discipline in the industry. On the PV side, it has catapulted itself to be among the top 3 OEMs with its forever range of products. On the EV side, it plans to build upon its leadership position in EPV space (market share 76% as of Q1FY24) with target to sell ~1 lakh E-PVs in FY24 and is also a prominent player winning orders in CESL E-bus tenders

* Aiming auto net debt free B/S by FY25E: TML is aiming to be auto net debt free by FY25 (~?43,700 crore as of FY23) amidst healthy CFO generation and calibrated capex spends, given the impending need to accelerate spending towards electrification (JLR to spend £15 billion over next 5 years). Deleveraging B/S is structurally positive & should drive re-rating of the stock.

Rating and Target Price

* We assign BUY rating on TML tracking guidance of record profitability and cash flow generation at JLR for FY24E, strong intent to become net debt free (auto) by FY25E & market share gain aspirations across product categories.

* Our target price for TML is ?810 on SOTP basis (10x, 2x FY25E EV/EBITDA to India, JLR; ?200 value to Indian EV business & stake in Tata Technologies)

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