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Tata Motors Brokerage Report: Should You Buy, Sell Or Hold?
The brokerage report is from Motilal Oswal and is written by Jinesh Gandhi – Research Analyst (Jinesh@MotilalOswal.com) | Research Analyst: Amber Shukla (Amber.Shukla@MotilalOswal.com) | Aniket Desai (Aniket.Desai@MotilalOswal.com)
Synopsis of the Report and View on Tata Motors
JLR’s luxury premium positioning largely achieved
Healthy demand for JLR, CVs: India PV growth likely to moderate in FY24
We interacted with the management of Tata Motors (TTMT) to get an update on the demand scenario, the state of the global supply chain, JLR’s path to sustainable growth, and the outlook for its India CV/PV businesses. For JLR, supplies are gradually improving and demand is healthy. As supplies improve, JLR should reach near the zero net debt level by FY25, aided by improved production, better margins and working capital release. JLR will structurally continue its journey from being a premium brand to a premium luxury brand by focusing on its brand pull strategy and redefining Jaguar with premium positioning in the era of EVs with new launches starting from CY25. While its India businesses are already on a sustainable growth path, JLR is turning the corner and would be the key driver of the stock. Further, the monetization of its stake in Tata Technologies (possible value of INR25-47/share for TTMT) could also act as a catalyst for the stock. Maintain BUY with a TP of INR540 (Mar’25E based SOTP).
JLR – supplies improving gradually, demand robust: The supply of chips has been gradually increasing and should continue to improve in FY24 as well. The order book is strong, led by a stable demand environment and strong brand pull of the recently launched models. Defender's commercial activity has just begun, while the company is yet to exercise multiple levers for RR/RR Sports (RRS). Variable marketing expenses (VME) are expected to rise as the supply continues to improve, resulting in an increase in demand for other LR models as well
JLR achieves premium luxury positioning: The company has purposefully moved away from "pushing" its goods into the market and leveraged supply issues to elevate its standing from premium to luxury premium. The company has defocused on models through its brand pull strategy and is not pushing other models through discounts. The management is prioritizing revenue over volume to gauge progress; revenue is only 15% below the FY18 peak even as volumes are down 43%. It will continue to focus on profitable growth and does not just want to be a niche player.
Jaguar brand to be revolutionized: With an emphasis on revitalizing the brand, JLR is redefining Jaguar with premium positioning in the era of electric vehicles. In CY25, it would introduce the first BEV Jaguar, which would be significantly different from the current model. It will be followed by several EV product launches. n EVs – all key models to have BEV offerings by CY26: Unlike its competitors, JLR is beginning its BEV journey with its key RR/RRS products in CY24. By CY26, all of its important models would come with a BEV option. It has a busy timeline of BEV launches, with the RR (RR/RRS) in CY24 and Jaguar in CY25
JLR – focusing on driving double-digit EBIT margin by FY26: likely to reach near net debt zero by FY25: The management is confident of achieving 10% EBIT margin by FY26 (v/s 3.7% in 3QFY23), driven by 1) the normalization of many discontinuities like the premium cost of chips, vendor compensation for lower volumes, commodity/energy costs; 2) richer mix; 3) favourable FX; and 4) operating leverage. This is after factoring in some dilution in the mix as well as an increase in VME. Apart from this, we believe working capital release (negative working capital business) and controlled capex should help JLR inch closer to the zero net debt level by FY25E (v/s EUR3.85b in Dec’22), which is delayed by a few quarters v/s earlier guidance of FY24.
India CV demand holding up: Stable freight rates, profitability of fleet operators and collection data from financiers indicate healthy demand. Moreover, the anticipation of healthy replacement demand and scrappage policy would be additional growth drivers. The management focuses on increasing value through innovations in terms of goods, services and other solutions, rather than increasing the market share through discounts. LCVs, which have witnessed a robust post-Covid recovery, are likely to moderate.
India PV business – expect 5-7% industry growth in FY24: The management indicated that pent-up demand and post-Covid euphoria seen in the PV segment are slowly abating. Hence, it expects the PV industry to grow by 5-7% in FY24. The company plans to follow an aggressive strategy in the EV segment as it is focusing on creating this segment.
CNG is more effective than diesel if CNG price is at least 25% cheaper: Demand for CNG CVs has been hampered by rising CNG prices. However, the growth strategy for TTMT will involve a variety of powertrains (ICE, CNG, EV).
India capex largely focused on product development: Capex of INR20-30b p.a. in M&HCV is mainly aimed at products as current capacity utilization stands at 55-60%. In the ICE PV business, TTMT will be able to fund capex from cash flows. The company will continue to invest aggressively in the e-PV business, which is well funded currently as the last tranche of INR37.5b (out of total INR75b) has come from the TPG deal.
The ramp-up in the PV/CV businesses, along with a possible fund raise at Tata Technologies, would help the India business move closer to becoming net debt free by FY24. JLR’s journey to reach closer to the zero net debt level is delayed by a few quarters due to chip shortages (expects to achieve by FY25).
Valuation & view
TTMT should witness a gradual recovery as supply-side issues ease (for JLR) and commodity headwinds stabilize (for the India business). It will benefit from: 1) a macro recovery in India, 2) company-specific volume/margin drivers, and 3) a sharp improvement in FCF and leverage in JLR as well as the India business. The stock trades at 15.2x/12.3x FY24E/FY25E consolidated P/E and 3.8x/3.2x EV/EBITDA. We reiterate our BUY rating on the stock with a TP of ~INR540 (Mar’25E-based SoTP).
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