ICICI Direct's research report on Tata Motors
Media reports suggest that the top management of Tata Motors (TML) at its recent AGM expressed an intent to reduce automotive debt (~Rs 48,000 crore as of FY20) to near zero levels in the next three years. This follows the recent guidance of turning JLR, Indian operations sustainably FCF positive (from FY22E, FY21E respectively). While the intent is encouraging, we remain slightly circumspect about the deleveraging timeline, given that positive FCF from FY22E will continue to be accompanied by critical capex for new product development and new age technologies i.e. ACES. As per our estimates, complete automobile segment deleveraging could happen sometime in FY24E-25E, provided - (i) Indian and JLR operations do not disappoint on the volume or operating matrix front and (ii) the global business remains buoyant during this time. We await greater detail about the proposed deleveraging plan. However, the intent of creating shareholder value through meaningful debt reduction as well as the strong response to new model launches at TML makes us turn positive on the stock. We raise our valuation multiples for various businesses at TML and, thereby, upgrade our rating and target price on the stock in view of B/S strengthening commitment and recovery in volumes post Covid-19.
We derive comfort from consistent promoter backing to TML (infusion of Rs 6,500 crore at a price of Rs 150) through preferential allotment of equity shares and warrants. We upgrade the stock from HOLD to BUY, valuing it at Rs 160/share on SOTP basis (12x EV/EBITDA to domestic business, 4.2x EV/EBITDA to JLR on FY22E numbers & 1x P/B to its other long-term investments). The key risks to our call are (i) second wave of Covid, which could dampen business sentiments, (ii) dilution of future competitiveness amid reducing capex intensity and (iii) muted Q2FY21E results given inventory correction at JLR (expectation of loss at JLR).
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