Tata Motors Bets Big On EV Disruption Strategy To Drive Growth

The immediate reaction to Tata Motors Ltd.'s results was negative, and the markets gave it a thumbs down based on the estimates for FY23. However, there are a number of interesting pointers in the management’s conference call and the enthusiastic vision statement from Tata Sons Pvt.'s Chairman N Chandrasekaran.

These statements are backed by emerging trends and Tata Motors' leadership role in the electric vehicle space. The key point, thus, is that Tata Motors clearly wants to go the EV way.

On the occasion of launching the 50,000th electric vehicle, Tata Group Chairperson N Chandrasekaran, said, "There is no EV ecosystem in India, but we had to start it. I had a conviction that pivoting to EVs is the right thing for Tata Motors, the industry, and the nation. At Tata Group, we have different companies that could immediately come together and create the ecosystem that was required and produce our first EV—the Tigor EV."

He sees exciting years ahead, "where EV mobility will continue to rise and attain significant scale in the Indian market".

The numbers in this segment show that Tata Motors is focusing on using EV disruption to its advantage in the passenger vehicle segment. Tata Motors clocked a sale of 11,500 units of EVs in the second quarter of the current fiscal, which is the highest-ever sales for the company in a quarter. EV business grew by over 326% YoY and by over 371% in the first half of the current fiscal.

EVs contribute approximately 8% to the overall PV sales of Tata Motors and have a market share of 87% in the EV segment. The margin of EVs is not very different from what we see for the internal combustion engine segment.

PV is expected to further strengthen in the next financial year as the benefits of performance-linked incentives also start coming in.

The management is expecting to see market share gains in the PV segment (14.2% vs 6.9% in FY19), led by a revamped portfolio, customer preference for SUVs, and rising EV penetration.

Tata Motors launched India’s first electric entry hatchback, the Tiago EV, priced between Rs 8,49,000 and Rs 11,79,000. Its deliveries will commence in January 2023. The Tiago EV received a blockbuster opening with more than 10,000 bookings. Tiago is seeing strong demand in Kerala, Gujarat, the National Capital Region, Rajasthan and Telangana, the management told analysts in the conference call.

A similar drive is visible in the JLR portfolio. Range Rover BEV will be launched in 2024 as part of six new Range Rover, Defender and Discovery models planned by the end of 2026. Similarly, the transformation of Jaguar into an all-electric luxury brand remains on track, with the first new vehicles to be revealed before the end of 2024.

The primary reason for Tata Motors' decision to invest heavily in EVs is consumer preference, not sales figures. Consumers prefer EVs due to their low operating costs and the ensuing benefits in terms of annual savings. The premium that they pay for EVs is understandable.

However, more importantly, for most Nexon EV buyers, it is their first car or primary car. This category of consumers accounts for 65-70% of their EV sales, which used to be 25% earlier.

This demonstrates the consumer's conviction in an EV compared with an ICE vehicle, and thus Tata Motors’ overdrive on this front.

"The early adopters, the customers who chose to believe in our vehicles and adopted the EV moment, played a very important role by giving us valuable feedback that we could incorporate. O​ur cars, be it Tigor, Nexon EV, or Nexon EV Max, have all received huge receptions," the Tata Sons Chairman said.

In the short- to medium-term, revenue and margins are a concern. But the management's comments in its conference call with analysts sounded positive. They expect chip supply to improve and commodity prices to cool down, which will aid revenue and margin recovery. Hence, it aims to deliver improvements in EBIT and free cash flows in the second half of the current fiscal.

The company has a target to achieve 5% EBIT margins in FY23 and £1 billion of positive free cash flow in FY23. In addition, JLR’s medium- and long-term financial targets under its reimagined strategy remain unchanged. This includes increasing EBIT margins to 10% or more by FY26 and improving cash flow to achieve near-zero net debt in FY24.

JLR is continuing to focus on signing long-term partnership agreements with chip suppliers, which is improving the visibility of future chip supply. The automobile major is also bringing an electric focus to its commercial vehicles to increase market share. It recently unveiled its first small commercial vehicle, the Tata Ace EV, and plans to bring out more soon.

Tata Motors expects wholesale sales to be 1,60,000 units in the second half of the current fiscal, compared with 1,47,000 units in the first half. The improvement in sales will be mainly seen in the fourth quarter of the current fiscal. The order book increased from 2,00,000 in Q1 to 2,05,000 units at the end of Q2.

Tata Motors has announced a capex of Rs 6,000 crore on a consolidated basis. With last year’s fundraising from the TPG Group, it has the wherewithal to support its aspirations in the EV segment.

Tata Motors already received an investment of Rs 3,750 crore from private equity fund TPG Rise for its EV subsidiary, Tata Motors Electric Mobility Ltd., as part of its first tranche for an 11-15% stake. The deal valued Tata’s EV business at $9.1 billion.

Analysts see demand remaining strong. It will be a key indicator to monitor, though, given the global uncertainties in the short run.

Motilal Oswal values Tata Motors' electric-passenger vehicle business on a discounted cash flow basis at Rs 77 per share, assuming a 25% market share in the e-PV industry by FY27, with an EV penetration of 10%. However, on a sum-of-the-parts basis, the valuations are higher, as given in the table.

In all, 25 out of 34 brokerages suggest a "buy" rating on the stock; six maintain a "hold" rating; and only three brokerages have a "sell" rating on the stock.

The 12-month target price of Rs 501 per share represents a 21% upside from the current market price of Rs 413.