Estimates changed due to Covid-19 crisis; TP down to Rs 130; correction of recent months makes valuations cheap; ‘Buy’ maintained.
We believe Tata Motors will resort to aggressive cost-cutting and capex reduction to tide over the crises over the next 12 months. The company has committed credit lines from banks to keep JLR afloat. As of now, JLR is trading at bankruptcy valuations. We maintain Buy as we believe JLR will be able to remain afloat despite the likelihood of a global recession. We revise our fair value to Rs 130 (from Rs 215 earlier).
FY2021e – tough year ahead for Tata Motors but liquidity remains adequate
Given the economic slowdown due to Covid-19, we expect global auto volumes to remain under pressure in CY2020e, which will put pressure on JLR volumes as well. We expect JLR to generate negative cash flow of GBP 1.8 bn in FY2021-22e. However, we expect the company to initiate cost savings of GBP1.1 bn under project Charge+ by focusing on material cost reduction, leveraging profitable portfolios, etc.
JLR’s total liquidity stood at GBP5.8 bn, including GBP3.9 bn of cash and GBP1.9 bn of committed revolving credit facility (RCF) at the end of December 31, 2019. Over the next two years, the company has to pay ~GBP1 bn as principal repayment. We expect net debt/Ebitda to increase from 1X in FY2020e to 2.1X in FY2021e. Overall, in terms of liquidity, JLR remains well capitalised over the next two years.
We expect cash outflow of Rs 39 bn in the standalone entity over FY2021-22e due to weak CV volumes. Additionally, there is a principal payment due of Rs 144 bn over the next two years as well. Again, Tata Motors had a cash equivalent of Rs 87 bn (includes proceeds of preferential allotment amounting to Rs 39 bn by Tata Sons) and undrawn RCF of Rs 15 bn. Tata Sons will further infuse Rs 26 bn in FY2021e, increasing their stake in the company to 46.4%. We believe the company will be able to raise additional funds through the ECB route backed by strong parent support to tide over the crisis.
Valuation remains attractive given steep price correction over past three months
The stock price has corrected by 63% over the past three months. The value of the standalone entity as per our calculations stands at Rs 49 per share based on 1X March 2022e BVPS, which includes losses from the PV business as well. Tata Motors will hive off its PV business into a separate subsidiary and will eventually look for a strategic alliance that provides access to products, architectures, etc. This will result in further unlocking of value for Tata Motors’ standalone CV business. At CMP, implied P/E multiple for the JLR business comes out to be 1-1.5X March 2022e , which we believe is cheap.