Upgrade to BUY on Tata Motors - With improving outlook, FCF to turn positive - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

We upgrade Tata Motors to BUY (ADD earlier) as the OEM will benefit from an improving demand outlook, cost-cutting initiatives, and better FCF generation. JLR's retail volumes are improving from COVID lows, and system inventories are normalising. We are building in double-digit volume growth at JLR over FY22/23E (12/11%). The luxury OEM has turned FCF positive (+GBP 463m in 2Q), a trend which we expect would sustain over FY22/23E. The loss-making India PV business has turned the corner and reported a positive margin, driven by robust market share gains. This will improve domestic cash flows and make the PV business more attractive for potential partners.

Volume pick-up at JLR: Demand is improving at Jaguar Land Rover as key markets such as China (~20% of volumes) have recovered to pre-COVID levels. Further, most countries are now witnessing a pick-up in volumes, which resulted in 2Q volumes rising 53% QoQ. The OEM is expected to witness a recovery in global demand, and we are building in double-digit volume growth (12/11%) for FY22/23E. The recent launch of the Defender has received an encouraging response, with the model currently having a waiting list. Further, JLR is launching EV variants of its product line-up over FY21-23E to comply with stringent emission norms.

Loss-making India PV segment has turned the corner as the segment reported a positive EBITDA margin of 1.6% in 2Q, driven by encouraging volume growth. This segment's market share has risen to 7.9% in 1H (vs 4.8% in FY20). We believe that the unit will witness improved cash flows as the OEM benefits from its revamped product portfolio. Further, Tata will find it easier to seek a partner for the car segment now that volumes and profitability are improving. The India CV segment is also witnessing a gradual revival, with LCV volumes back to pre-COVID levels and MHCV volumes witnessing a tepid improvement.

FCF trends are improving: The company has turned FCF positive in 2Q (Rs 67bn), driven by improved working capital management - the inventory at JLR has corrected on improving retails. Further, the management achieved Charge+ savings of GBP 1.8bn over 1HFY21 (the company is on track of achieving its target to save GBP 2.5bn in FY21). We believe that gearing levels will improve here onwards and net-debt/equity ratio will improve from 1.6x to 1.1x over FY21-23E.

Upgrade to BUY: We set a revised Sep-22 SOTP-based target price of Rs 175 as we raise our FY23 estimates by 8% on an improving outlook. We value the India business at 10x EV/EBITDA and the JLR business at 2x EV/EBITDA. Key risks: Unfavourable outcome of Brexit, delayed vaccine roll-out, and more prolonged second COVID-related lockdowns.

Shares of TATA MOTORS LTD. was last trading in BSE at Rs.146.35 as compared to the previous close of Rs. 151.15. The total number of shares traded during the day was 1759776 in over 11362 trades.

The stock hit an intraday high of Rs. 150 and intraday low of 145.5. The net turnover during the day was Rs. 259278955.

Source : Equity Bulls

Keywords