Brokerage firm UBS has downgraded Tata Motors Ltd from neutral to sell. However, it has raised its twelve-month target price for the company's shares to Rs 450 from Rs 320 earlier.
UBS conducted an extensive analysis of the global premium electric vehicle (EV) industry with a focus on Jaguar Land Rover (JLR), which constitutes over two-thirds of its sales and EBITDA in fiscal year 2023. The findings reveal that the market is underestimating the risks and vulnerabilities faced by JLR due to the rapid electrification of premium cars. Additionally, Tata's domestic market share in the automotive industry is nearing its peak due to intensifying competition.
UBS believes that JLR's recent strong performance, surpassing the S&P BSE Auto Index by approximately 23% year-to-date, is not sustainable. This performance was driven by an unsustainable product mix and minimal discounts, leading UBS to view it as a favorable opportunity for investors to sell their holdings.
Despite JLR's lagging financial and technology parameters, its current price implies a price-to-earnings ratio that is 70% higher than that of BMW AG/Mercedes. UBS highlights JLR's anticipated decline in average selling prices and margins in the second half of FY24, along with India's underperformance in market share and margins, as key factors supporting their view. However, it should be noted that the expansion of JLR's margins poses a risk to UBS's assessment.
UBS suggests that investors may be overlooking the significant impact of electrification on the global premium car market. The firm highlights the disruption caused by electrification in China to the profit pool of premium brands worldwide, anticipating a similar trend in other regions. Consequently, UBS expects JLR's margins to decline to around 4% in FY25/FY26, deviating significantly from the company's medium-term guidance of achieving double-digit EBIT margins. UBS also expresses caution regarding JLR's strategy of prioritizing Jaguar and introducing three new electric vehicle models, citing previous lackluster attempts to revive the brand.
Tata has successfully revitalized its presence in the passenger vehicle (PV) segment in India through its new model cycle and innovative approach of converting ICE vehicles to EVs. However, UBS predicts that Tata's market share in the PV segment will peak due to a relatively weaker launch pipeline compared to market leader Maruti, coupled with increasing competition in the EV market. UBS also notes that Tata's competitors have strong EV launch pipelines, prompting a reassessment of Tata's EV valuation. In the commercial vehicle (CV) segment, Tata continues to struggle with lower volumes and margins, raising concerns about a potential CV market slowdown.
"We value JLR at 7x FY25E PE, in line with BMW's and MBG's current average multiples. We assign 11x/6x EV/EBITDA for India's CV/ICE PV (15-30% discounts versus our target multiples for peers, owing to Tata's market share losses), and value the EV business at a 40% discount to the stake sale price, considering the sharp valuation correction for pure-play EV companies since Tata's sale of its stake", UBS said in its note.