ADD on Tata Motors - Tightening the belt - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities.

Tata Motors (Q4FY20): Tightening the belt. ADD
(TP Rs 112, CMP Rs 103, MCap Rs 317 bn)

Amidst the COVID backdrop, Tata Motors management is focused on conserving capital by aggressively scaling back capex spends in FY21E (by over 30%) as well as seeking a strategic partner for the loss-making India passenger car business. As the business normalises at JLR/India, the cash flows are expected to improve over CY21E (led by working capital reduction). As stock valuations at below FY20 book value (0.8x) are factoring in a challenging environment; we reinstate coverage with an ADD rating.

Capital conservation: The net debt at JLR has risen to Rs 420bn in FY20 (from Rs 280bn in FY19), impacted by COVID - the debt/EBITDA at JLR is now at 2.9x (vs. 2.3x in FY19). The OEM is focusing on conserving cash by scaling down capex and accelerating its cost saving programs both in India and overseas (1) Capex spends to reduce by over 30% in FY21E (expenditure scaled back to Rs 15bn in India vs. Rs 53bn YoY; JLR revised capex is GBP 2.5bn vs. GBP 3.3bn) (2) Incremental cost savings of GBP 1.5bn under Project Charge+ at JLR in FY21.

Seeking a partner for loss making India car business: Tata Motors is exploring options for a strategic alliance for the domestic PV segment, that will provide access to capital, products, architectures and new age technologies. This step will reduce investments/capex required by the OEM. The segment assets of this division are Rs 168bn ($2.2bn) and the company has taken a write off amounting to Rs 25.7bn for the passenger car segment in India.

Business outlook: The demand environment at JLR is expected to gradually normalize over 2HFY21, as countries are emerging out of the lockdown. The new Defender will keep product excitement alive, as the model has received 22,000 bookings. While sales are expected to decline in FY21, China will benefit from an early revival. To contend with the volatile environment, JLR is reducing breakeven point to 500,000 units through various cost saving initiatives over FY21E. In India, we expect a delayed recovery for the MHCV segment, where Tata Motors remains dominant with a 50% market share. For the car business, the OEM is reducing fixed costs and will focus on improving the (front end) sales experience for customers.

Re-instate coverage with an ADD rating: We set a Mar-22 SOTP target price of Rs 112. We value the India business at 9x EV/EBITDA and the JLR business at 2x EV/EBITDA. Key risks: Earlier than expected stake sale of the PV business on the upside, delayed economic recovery and any increase in geo political risks on the downside.

Shares of TATA MOTORS LTD. was last trading in BSE at Rs.104.75 as compared to the previous close of Rs. 104.35. The total number of shares traded during the day was 5491674 in over 19897 trades.

The stock hit an intraday high of Rs. 110.8 and intraday low of 104.2. The net turnover during the day was Rs. 593334019.

Source : Equity Bulls

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