Tata Motors rating – Buy: TPG deal a positive surprise for company

It will address cash flow needs of EV segment; biz tailwinds should improve B/S; TP raised to Rs 539 from Rs 397; ‘Buy’ retained

The Tata Nexon EV launch at Taj lands End in Bandra. Express photo by Prashant Nadkar, Thursday 19th December 2019, Mumbai, Maharashtra.

The Tata Motors and TPG deal is surprising and positive for TTMT as: (i) TPG is ascribing a value of $6.7–9 bn to TTMT’s India passenger EV business—merely 1k unit sales in Sept-21; (ii) it addresses cash flow needs of the EV business (>Rs 160 bn) for the next five years; and (iii) the traditional PV business can focus on its goal of double-digit market share, high single-digit margins and being FCF-positive.

We had earlier argued that old-line OEMs have come a long way in building capabilities while valuations are stuck in the slow lane, implying a huge option value. TTMT’s India PV business has demonstrated this, while all eyes were on JLR. Retain ‘BUY/SO’ with a revised SoTP-based TP of Rs 539 (earlier Rs 397).

Key highlights
Details of deal: TPG Rise Climate along with co-investor ADQ will invest $1 bn in tranches over a period of 18 months in the form of CCPS for an 11–15% stake (depending on certain thresholds) in TTMT (S) EVCo [new passenger EV company as a subsidiary of TTMT (S)]. TTMT (S) EVCo will be asset-light and use the existing TMP ecosystem for manufacturing, branding, back office support, etc.

Capex: Till now, TTMT (S) has invested ~Rs 150 bn into the EV business. Further, it expects >$2 bn investment over five years to launch 10 EVs (across price points). And it will create EV infrastructure in India, if needed, in association with Tata Power.

EV business breakeven and profitability: Being an asset-light model, it will be Ebitda breakeven in FY23 as volumes scale up. Gross margins are similar to ICE. Over next 5 years, expectation is EV penetration will be ~10% with TTMT’s market share at ~20%.

Key catalysts for EV adoption: (i) Rising cost of ICE due to regulatory requirement, rising fuel cost and reducing prices of EV to bring TCO of EVs in parity with ICE engines. (ii) More model launches by industry to bring in awareness. (iii) Expansion of network – distribution, charging. (iv) Introduction of long-range products. (v) Government push for EV adoption.

Outlook and valuation: EV surprise
India and JLR are on the cusp of strong demand and product cycle tailwinds. This should facilitate balance sheet improvement–key driver of our Braveheart call. The TPG deal provides additional comfort on TTMT India EV capabilities. This will be applicable to other old-line OEMs too. As collateral damage will be the questions on traditional ICEPV business. This is already reflected in the valuation of global old-line OEMs.

We are raising SoTP-based TP to Rs 539 (from Rs 397) as we roll over to Mar-23, incorporating Rs 105 as value for the EV business (assumed 20% discount to mid-point value of transaction at $7.7 bn) and lower the EV/Ebitda for traditional PV business to 5x from 15x earlier to recognise the cannibalisation risk. Key event to watch out for will be the ramp-up in EV business. Maintain ‘BUY/SO’.

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