IGI Logo

EV deal to reduce capex outgo

The recent binding agreement executed between M&M and British International Investments (BII) would result in total cash inflow of Rs38.5bn from both parties together into a new wholly-owned electric vehicle (EV) subsidiary (EV Co). With valuation of the EV Co being up to ~US$9bn, BII’s stake in it would be in the 2.75- 4.75% band (subject to business performance). Thus, through this deal, against annual capex related to EV SUVs being ~Rs20bn for the period FY24-FY27, MM will save a year of cash outflow. BII will not impart any technological edge to MM, though it will help implement best ESG practices for the the EV Co other than giving it a long-term investment commitment. Pinifarina would not be associated with it as design/R&D for the EV Co is being done in-house by MM. Thus, irrespective of deal valuation, we believe the only change in our current estimate currently through this deal would be a capex saving of ~Rs20bn in FY24E, with rest of the estimates remaining unchanged. At industry level, be it 20% or 30% mix of EVs within UVs by FY27, key monitorable would be the total portfolio growth and profitability for MM, but we believe it is still too early to take a reasoned stance on it. Maintain HOLD on MM with a revised DCF-based target price of Rs1,191 (earlier: Rs1,150), implying 15x FY24E core earnings and discounted value of stake in the various listed entities.

Salient aspects of the deal and our take on them:

*  With cumulative investment earmarked by MM for the EV Co in FY24-FY27 at Rs100bn, this deal would save capex outflow of Rs19.25bn for MM during the period, with no incremental technological support. The design and development teams in the Detroit R&D centre and Chennai MRV would develop the models, with the initial ones being EV versions of existing brands. The EV Co will remain assetlight and would use MM’s facilities w.r.t. manufacturing, purchasing, R&D, technology and distribution. EV Co. will get an initial tranche of Rs12bn in FY23 from BII with the remaining Rs7.25bn to come in FY24. We believe, the implied valuation of the deal is insignificant at the current juncture from a value-unlocking perspective as the stake sale is capped at ~5% and value of the fund raised is merely a year of capex needs. For example, Ashok Leyland (AL) sold 1% stake in its wholly-owned EV subsidiary (Switch Mobility) to Dana Corp with an implied valuation of ~US$1.8bn against then market cap of ~US$4bn. Such a small stake sale resulted in hardly any value unlocking on AL’s valuation.

* We believe, deal covenants would be linked to the EV share in MM’s UV portfolio, market share in the e-PV space, and its profitability. Though our analysis suggests EBITDA for the EV Co at Rs8bn-10bn in FY26E, we believe the EBITDA would largely be at the cost of ICE portfolio’s EBITDA shifting to EVs. Thus, at 15x EV/EBITDA, though the EV Co can get valued at ~US$2bn in next 18-24 months, we don’t think market cap accretion for MM would be more than the quantum of capex saved, as it is too early to assume incremental value addition from the EV Co itself, without hurting ICE portfolio growth.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

SEBI Registration Number INZ000183631

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