Buy Tata Motors Ltd For Target Rs.515 - ICICI Direct
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EV stake sale unlocks value; indicative of potential
About the stock: Tata Motors (TML) is an auto OEM from the house of Tatas, operating in domestic (PV, CV) as well as 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 (models like Defender, Evoque, etc)
* FY21 consolidated revenue mix – JLR 78%, India CV ~13%, India PV ~7%
Company Update:
* TML has raised US$1 billion (~| 7,500 crore) via 11-15% stake sale (exact quantum dependent upon meeting of revenue thresholds) in its India EV business (EVCo) to TPG Rise (TPG Rise Climate Fund; ADQ is co investor)
* The implied valuation of EVCo is pegged at US$6.7 – 9.1 billion
* EVCo will invest >US$2 billion (i.e. >| 16,000 crore) over the next five years in products, platforms, drive trains, dedicated EV manufacturing, charging infrastructure and advanced technologies. Committed to 10 EVs by FY26
What should investors do?
TML’s stock price has underperformed Nifty Auto index in past five years, having de-grown at ~5% CAGR (~| 555 in October 2016).
* We maintain BUY on EV proactiveness and continued deleveraging focus
Target Price and Valuation: The transaction unlocks EV business value and demonstrates the future potential of the changing technology landscape in mobility. We value TML at a revised target price of | 515 on SOTP basis vs. | 450 earlier (15x, 3.3x FY23E EV/EBITDA on India, JLR businesses, respectively). We slightly revise India PV, JLR volume estimates and arrive at | 90/share value for EVCo assuming 15% stake sale @| 7,500 crore (conservatively) and 20% holding company discount.
Key triggers for future price performance:
* We expect 20.8% FY21-23E revenue CAGR backed by 16.2% volume CAGR; margins seen at 14.7% in FY23E along with RoE of 20%
* Continued proactive measures towards electrification Deleveraging progress (FY21 net automotive debt at ~| 41,000 crore)
Alternate Stock Idea: Apart from TML, in our OEM coverage we also like M&M.
* Focused on prudent capital allocation, UV differentiation & EV proactiveness
* BUY with target price of |1,000
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