Tata Motors' Shares Hit Four-Year High As Analysts Cheer EV Fundraise

Shares of Tata Motors Ltd. rose to their highest since Feb. 14, 2017 after the company on Tuesday announced plans to raise as much as $1 billion (about Rs 7,500 crore) for its newly incorporated electric vehicle subsidiary TML EVCo.

Investors TPG Rise Climate and ADQ agreed to pump in the money for an 11-15% stake in the unit, Tata Motors said in a media statement. That translates into an equity valuation of up to $9.1 billion, it said.

TML EVCo. will be an asset-light subsidiary that will leverage all existing investments and capabilities of Tata Motors, channelise future investments into electric vehicles, advanced automotive technologies and catalyse investments in charging infrastructure and battery technologies, the company said in its exchange filing.

The unit will invest over Rs 16,000 crore in the next five years and also aims to create a portfolio of 10 electric vehicles during the period.

Shares of Tata Motors gained as much as 19.5% to Rs 502.9 apiece. This is the most the stock has gained intraday since Feb. 2 this year, and the highest level since at least Feb. 14, 2017 when it hit Rs 506.7 apiece.

Of the 31 analysts tracking the company, 23 suggest 'buy', six maintain 'hold' and two recommend 'sell'. The overall consensus price of analysts tracked by Bloomberg implies a downside of 10.5%.

Here's what brokerages made of Tata Motors' move:

Motilal Oswal

• Maintains 'buy' rating with a target price of Rs 560 per share, implying a potential upside of 33%.

• While this business is still at a nascent stage, this transaction sets benchmark valuations and makes us value this business separately, unlike implicitly valued with the domestic passenger vehicle business.

• We value this EV business at around $5.4 billion on a discounted cash flow basis, or Rs 90 per share. Even if we benchmark EVCo. valuations to the deal valuations of $6.7 billion at the lower band, considering equity conversion is planned for FY27, we would discount back the deal valuation to September 2023 (our target price date).

• We lower our target multiple for the passenger vehicle business to 10x from 12x as any increase in the value of the EV business has a negative connotation for the PV business, though at an overall PV business level Tata Motors may benefit from EVs.

• Recovery is underway in all of the three businesses of Tata Motors. While the India commercial vehicle business would see a cyclical recovery, the India PV business would witness a structural recovery. Jaguar Land Rover is witnessing a cyclical recovery, supported by a favourable product mix. However, supply-side issues would defer the recovery process.

Jefferies

• Maintains 'buy' rating, raises target price to Rs 565 from the earlier Rs 435, implying a potential upside of over 34%.

• The investment offers a big value boost for an otherwise underappreciated opportunity and the balance sheet strength to drive portfolio electrification.

• The stock also offers multiple other catalysts in demand revival, market share gains in Indian trucks and passenger vehicles and upcoming launch of next-gen Range-Rover models at Jaguar Land Rover.

• While Indian passenger EV market is still nascent, Tata has an early lead with nearly 70% share. Tata plans to expand its portfolio from 2 EVs presently to 10 models by FY26, which should be nearly 40% model share in the market expected to have 25 EVs by the time.

ICICI Securities

• Maintains 'buy' rating with a target price of Rs 515, implying a potential upside of 23%.

• We maintain our rating on Tata Motors' EV proactiveness and continued deleveraging focus.

• The transaction unlocks EV business value and demonstrates the future potential of the changing technology landscape in mobility.

• Apart from Tata Motors, we also like M&M as it is focused on prudent capital allocation, UV differentiation and EV proactiveness.

Antique Stock Broking

• Maintains ‘buy’ rating with a target price of Rs 550, implying a potential upside of 31%.

• Tata Group has the most credible plans to promote and develop the EV ecosystem in India.

• Tata Motors' PV business, including EVs, has been undervalued by the market. Hence, the investment by TPG Rise Climate can potentially unlock significant value.

• Tata Motors remains our top pick in the sector.

• EV sales have been growing strongly at 150-200% each year since FY17. Management estimates that 10% of PV industry sales in India and 20% of Tata Motors’ PV sales will be EV by FY26, led by favourable central and state government EV policies, including production linked incentive scheme. Stringent emission roadmap will necessitate EV adoption by original equipment manufacturers. Total cost of ownership parity with combustion engine vehicles will further propel EV adoption, and better customer options as OEMs introduce long-range EV models.

• We expect improvement in operating performance and financial deleveraging across Tata Motors' three businesses over the next three years.

• The key risks are slower than expected recovery in CV demand in India and further supply chain disruptions, including semi-conductor shortages.
  

Edelweiss

• Maintains ‘buy’ rating, raises target price to Rs 539 from the earlier Rs 397, implying a potential upside of 28%.

• The deal is surprising and positive for Tata Motors as TPG Rise Climate is ascribing a value of $6.7–$9 billion to Tata Motors’ India passenger EV business, which has sold merely 1,000 units in September 2021.

• The deal addresses cash flow needs of the EV business for the next five years. The traditional PV business can focus on its goal of double-digit market share, high single-digit margins and being free cash flow-positive.

• Key event to watch out for will be the ramp-up in EV business.

Nomura

• Upgrades rating to 'buy' from 'neutral', raises target price to Rs 547 from Rs 314 earlier, with an implied return of 29.98%.

• Tata Motors needs to invest heavily in new technology to achieve its EV ambitions. Capital raise lends confidence of an investment-led growth path in the future.

• While the PV business would get fully captured in EV business in the long run, the usual PV business still has potential to gain share.

• Raise our target EV/Ebitda multiple for JLR to 2x and add Rs 152 for the EV business to arrive at the higher target price of Rs 547.

Morgan Stanley

• Tata Group (Tata Motors & group companies) can collectively make an impact in EV space, as passenger EVs, unlike electric two-wheelers, need heavy investment in platforms and charging infrastructure.

• EV subsidiary to be asset-light business as it uses existing manufacturing capacity of PVs, existing PV brands and IP and Tata Motors' administrative infrastructure.

Prabhudas Lilladher

• Maintain ‘buy’ rating with a June 2023 target price of Rs 592, implying potential returns of over 40%.

• This transaction will lead to huge value unlocking for Tata Motors given its assertive stance on the EV ecosystem, early mover advantage, market share gains from well-strategized product pipeline in emerging segment, and benefit from new product launches and PV-focused strategy in traditional internal combustion engine segment.

• We earlier valued the entire PV business (including EV business) at around $2.3 billion, as against the EV subsidiary valuation of $9.1 billion which translates to incremental Rs 158 per share.

• Management showcased its confidence in the growth of the EV industry which will be driven by government incentives and PLI schemes focused on EVs. Further, new emission norms and rising fuel prices will lead to increased cost ownership of ICEs; which will necessitate EV adoption by OEMs.

Nirmal Bang

• Maintains ‘sell’ rating with a revised target price of Rs 351 from the earlier Rs 250. This implies a potential downside of 17%.

• The fundraise and outlook gives us more comfort on materialization of turnaround initiatives in the India PV business and a clear focus to maintain its early lead in the EV space.

• While underlying basis for valuations was not disclosed, these developments are positive for the India PV business as they provide us further comfort on faster and focused turnaround initiatives.

• However, we maintain our cautious stance on JLR as we see broader market expectations about its revival plans and medium-term strategy to be overly ambitious. We see JLR’s electrification strategy significantly lagging in the global trends, which could potentially lead to a de-rating of the stock as pressure on market share and margins intensifies.

• We also note that a prolonged chip shortage will restrict margin recovery and delay JLR’s deleveraging efforts. We believe that current valuation factors in most of the near-term upsides and lack of valuation comfort may restrict further meaningful gains.

• We have maintained our estimates but have increased the value of the India PV business as we incorporate India EV business valuation.