Buy Tenneco Clean Air Ltd For Target Rs.655 by Motilal Oswal Financial Services Ltd
Domestic visibility intact; export order halves
* Tenneco Clean Air (TENNIND) reported a value-added revenue of INR15.2b, up 32% YoY (11% above our est.). Revenue growth was led by strong order execution across both segments, with Clean Air & Powertrain growing 27% YoY and Suspension growing 38% YoY.
* EBITDA stood at INR2.6b (up 21% YoY), 6% above our estimates. EBITDA margin stood at 15.2% vs. 16.9% in 2QFY26 due to elevated commodity costs and the incremental cost of operating as a listed entity.
* PAT stood at INR1.7b (up 15% YoY), beating our estimates by 10% due to better-than-expected operational profits.
* The total order book stood at ~INR165b (up 33% vs. the FY26 order book), representing ~35% of Clean Air & Powertrain orders and 65% of Suspension orders. Overall booked business included INR8.7b from export programs, strengthening multi-year revenue visibility. Overall booked business now covers more than 100% of the company’s FY30 revenue plan.
* CFO for 1HFY27 stood at INR4.6b, and net cash stood at INR8.7b.
* Although the current order book provides more than 100% coverage of the FY2030 revenue target, the export outlook has weakened. The export order book has fallen ~50% YoY, hit by Western market contraction, Chinese competition and US tariff uncertainty. In addition, the implementation of BS VII has been delayed, pushing out the expected content-per-vehicle uplift in the domestic business. Factoring in the slower export recovery and the later BS VII timeline, we have cut our FY29E revenue estimate by 5%. The domestic order book, however, remains strong and has limited the impact of the export shortfall on earnings. As exports carried higher margins than the domestic business, we cut our margin estimates by 20-60 bp for FY27-FY29. At CMP, the stock is trading at 24.0x FY28E and 19.4x FY29E. We reiterate our BUY rating with a revised TP of INR655 (based on 30x Sep’28 EPS of INR22).
Valuation and view
* TENNIND enters its next phase of growth from a position of strength, commanding ~59% share in CV Clean Air, ~68% in off-highway Clean Air (ex-tractors), ~18% in PV Clean Air, and ~55% in PV shock absorbers and struts. These leadership positions, backed by deep OEM relationships and Tenneco’s global technology and R&D, create strong entry barriers. We see multiple growth levers ahead as premiumization raises suspension content, while BS-VII, CAFE III, and TREM-V drive higher Clean Air content across PVs, CVs, and off-highway applications. Localization of advanced technologies, new customer programs, and India’s emergence as an export hub should further support market- and wallet-share gains. We estimate a 17% earnings CAGR for the consolidated business (FY26-FY29E).
* With a capital-efficient model and strong balance sheet, TENNIND is well placed to pursue growth while sustaining healthy returns. Its net cash position, negative working capital cycle, 90%+ core RoCE, and strong cash conversion (70%+ CFO/EBITDA; 80%+ FCF/PAT) provide resilience and support expansion into new segments. At the CMP of INR468, the stock trades at 24.0x/19.4x FY28E/29E EPS. We have a BUY rating on the stock with a revised Target Price of INR655 (based on 30x Sep’28E earnings).
* Key risks:
1) Faster EV adoption
2) termination of the technology license or PE exit overhang
3) intensifying competition
4) commodity fluctuations
5) loss of key customers.
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