Citigroup, JPMorgan see up to 30% upside in Tata Motors; stake sale in Tata Tech positive
JPMorgan which has an overweight rating in Tata Motors and a March 2018 target price of Rs570 said that the funds from Tata Technologies could be used to partly pare down parent company debt of USD 2.9 billion
Global brokerage firms such as Citigroup and JPMorgan maintain a positive recommendation on Tata Motors after Warburg Pincus said it will purchase approximately 30 percent from Tata Motors Limited and its subsidiary Sheba Properties Limited, and another 13 percent held by Tata Capital.
The biggest automobile maker by revenue will get about Rs 1,600 crore from the sale of its 30 percent stake in IT company Tata Technologies to global private equity firm Warburg Pincus.
Cash infusion of up to Rs16.2 billion into Tata Motors is a welcome development, given the capex outlay of Rs30-Rs35bn per year for the next 2-3 years coupled with the fact that the capital structure at the parent level balance sheet is stretched, with gross D/E approximately 1:1 as of 31 Mar 2017m, said a Citigroup report.
Even post the transaction, Tata Motors and affiliates of the Tata Group will continue to retain a significant minority interest of approximately 43 percent in Tata Technologies, with the remaining ownership held by the management team and other shareholders, the company said in a statement.
Citigroup which maintains a buy rating on Tata Motors has a 12-month target price of Rs 595 which translates into an upside of 32 percent from current levels.
“We maintain our buy recommendation on Tata Motors as we expect a strong performance by JLR, driven by a robust product pipeline which should result in healthy volume growth as well as higher margins due to new models/refreshes,” said the report.
Even though the domestic commercial vehicle (CV) business continues to face macro headwinds, the domestic PV business appears to be recovering with market share gains driven by new model launches, suggest experts.
JPMorgan which has an overweight rating in Tata Motors and a March 2018 target price of Rs570 said that the funds from Tata Technologies could be used to partly pare down parent company debt of USD 2.9 billion.
The noncore investments in Tata Motors (notably its Tata Sons’ investments) are not valued in any meaningful manner by either us or the market.
“If eventually there is a path for liquidating such investments, then there could be a case for including these in the SOTP valuations but absent such a move, we choose to exclude it,” said the report.
The global investment bank sees multiple tailwinds driving earnings performance through FY18:
1) JLR’s model cycle will remain exciting over the next 18 months as it rolls out six new SUV models, driving mix improvement in both revenues and margins. JLR remains one of the fastest-growing global luxury OEMs and it should continue to improve its market share, in our view,
2) Profitability improvement at the China JV (CJLR) on higher utilisation should boost profits,
3) FX moves (GBP depreciation) should help earnings as the hedge book progressively rolls off, and4) We model a return to profitability for the India business only in FY19.