Tata Motors Ltd.
Tata Motors Ltd manufactures cars and commercial automotive vehicles. The company designs manufacture and sells heavy, medium, and small CVs, including trucks, tankers, vans, buses, ambulances, and minibuses. TAMO also manufactures small cars and sports utility vehicles (SUVs).
The company is a leading CV manufacturer in India. TAMO acquired Jaguar and Land Rover (JLR) brands in 2008.
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We are positive on Tata Motors Limited driven by an expected robust operational performance by the company across its business segments.
The company continues to report strong monthly sales in November 2021, with commercial vehicle (CV) sales up 15.2% y-o-y and passenger vehicle (PV) sales up 37.6% y-o-y.
Chips shortage issue is easing and is expected to gradually improve from H2FY2022, which would help Jaguar and Land Rover (JLR) and PV vehicle (domestic) businesses to improve, driven by operating leverage benefits.
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The direct beneficiary of increasing economic activities.
We expect TAMO to be a direct beneficiary of recovery in domestic CV sales, led by improving the macro environment, higher infrastructure spending, and replacement demand.
We expect the domestic CV industry to post a 22% CAGR from FY2022E-FY2025E, where we expect TAMO to continue its dominancy across sub-segments, led by new product launches, diversified product portfolio, and strong sales and distribution network.
The company witnessed faster growth in higher tonnage trucks, led by increased construction and mining activities.
Strong volume momentum for the CV division.
TAMO is optimistic about the CV business and is gaining market share across the CV segment. The company expects the CV industry to do well in FY2022 because of increased e-Commerce penetration, increased industrial activities, urban demand revival, rural stability, and infrastructure push by the government.
In the SCV and pick-ups segment, the company plans to leverage Ace petrol at a price point equivalent to BS-IV; and reinforce Ace diesel’s brand equity.
The CV passenger segment (buses) will be aided by the opening of schools and corporate offices, as COVID-19 impact reduces over time.
Transforming product strategy in the domestic PV business
The PV business witnessed strong financials in Q2-Q4 of FY2021, showing robust sequential volume growth. TAMO has been gaining market share in the PV segment, led by 144% y-o-y growth in Q4FY2021.
The company witnessed the highest sales in the last 34 quarters with its ‘New Forever’ portfolio. The company was able to manage volume growth, led by focusing on a few products.
The company is focused on its five products, viz. Nexon, Tiago, Tigor, Altroz, and Harrier, in the PV segment and has doubled their sales in most of the products.
PE investors value TAMO’s EV subsidiary at US$ 6.7 billion-9.1 billion
PE investors, TPG and ADQ, are investing US $1 billion (Rs. 7,500) in the EV subsidiary of Tata Motors for a stake of 11-15%, depending upon revenue thresholds, which is not disclosed.
Valuation of the EV business is, thus, pegged at the US $6.7 billion-9.1 billion, depending upon the stake. TPG has committed funding of 50% by FY2023 and the balance 50% by CY2022.
The investment would be through compulsory convertible preference shares (CCPS). The EV company is planned to be created as an asset-lite new subsidiary of Tata Motors and will house all dedicated EV talent and design capabilities of the parent company.
EV to form 20% of Tata Motors Ltd’s PV sales over the next five years
Tata Motors Ltd targets a double-digit market share in the EV industry and expects 20% of its sales from EVs in the next five years.
The contribution margin of EVs is like that of its traditional PV (ICE technology). Management expects its EV business to be EBITDA breakeven by FY2023.
The EV company will leverage all existing investments in technologies, brands, manufacturing capacities, and sales network of TAMO’s PV company.
Tata Motors Ltd has a 71.4% market share in electrified vehicles in the passenger segment, with EV penetration at 2% of its PV portfolio. Nexon EV is a leader in the segment.
The company has been building up an ecosystem for EV infrastructure through support from group companies, such as Tata Automotive Company, Tata Power, Tata Chemicals, and Tata Motor Finance. Tata Power is helping it in creating charging infrastructure.
Tata Power has over 355 public charging points on an inter-city and intra-city basis and has a plan to take it to 700 by mid-FY2022.
With Tata Chemicals, Tata Motors Ltd is evaluating technical partners for establishing a Lithium-ion cell manufacturing plant. The pilot plant is operational for Lithium-ion batteries.
Gradual easing of chips shortage to help JLR production
Leading global suppliers of chips such as Renesas Electronics (Japan), NXP Semiconductors (Dutch supplier), Infineon Technologies (Germany), STMicroelectronics (Switzerland), and Texas Instruments (US) are witnessing increased inventories for the first time in three quarters, despite rising demand for auto chips.
This implies the easing of the chips shortage situation globally, though the market is expected to remain dynamic.
We expect JLR’s production to improve in H2FY2022, with a gradual easing of chips situation going forward and improving operational performance.
Tata Motors Ltd Stocks Recommendation.
We believe Tata Motors is taking the right steps towards increasing its focus on the EV business in India.
Funding from external investors would help the company to aggressively develop and launch EV models. Moreover, Tata Motors is likely to benefit from the re-rating of valuation multiples, driven by improved ESG ratings and its focus on EV technology.
Besides the EV business, we expect Tata Motors to benefit from all its business verticals JLR, CVs, and PVs. H2FY2021 saw strong volume growth and better operational efficiencies aided by aggressive product launches, market positioning, product differentiation, cost savings, and investments in R&D.
We expect operational performance to improve strongly in H2FY2022, as supply constraints are expected to ease gradually.
We expect Tata Motors to benefit from the improving macro-environment in India and globally, post normalisation of the economy.
The company is generating strong free cash flow (FCF), which will help it pursue its business plans and reduce high debts.
We expect TAMO to become earnings positive in FY2022E and post 64.8% y-o-y PAT growth in FY2023E, driven by a 16.7% revenue CAGR during FY2021-FY2023E and a 120-bps improvement in EBITDA margin to 13.4% in FY2023E from 12.2% in FY2021.
The stock is trading at P/E multiple of 17.1x and EV/EBITDA multiple of 5.2x its FY2023E estimates.
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Tata Motors Ltd Stocks Target Price.
We have a Buy recommendation for the Tata Motors Ltd stock for the year 2022 with a Target price of Rs 650. The current market price of the stock is Rs 472.
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- Tata Motors Stock Recommendation.
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