Tata Motors Ltd’s shares jumped by nearly 20 percent in morning trade on Wednesday on the National Stock Exchange (NSE), hitting a new 52-week high yet again. The reason for the excitement is simple.
TPG Rise Climate and Abu Dhabi’s ADQ said they would invest Rs 7,500 crore in Tata Motors’ new subsidiary, EVCo, which will spearhead the group’s passenger electric mobility business. EV is short for electric vehicles.
The investment would be through compulsory convertible preference shares for a stake of between 11 percent and 15 percent depending on revenue performance. This translates into an equity valuation of up to $9.1 billion (or around Rs 68,000 crore). After October 13's increase, the combined market capitalisation of Tata Motors and Tata Motors differential voting rights shares stood at Rs 1.8 lakh crore, representing an increase of Rs 29,951 crore in a single day.
Analysts feel this would unlock value in Tata Motors’ EV business. “Tata Motors’ Passenger Vehicle (PV) business, including BEVs, has been undervalued by the market. Hence, the investment by TPG in Tata's BEV business can potentially unlock significant value,” Antique Stock Broking analysts said in a report on October 13.
BEV refers to battery EVs. Antique has revised its target price upwards for the Tata Motors stock to Rs 550 per share from Rs 400 previously.
The broker is not alone. Ambit Capital too has raised its target price to Rs 540 from Rs 464 earlier. “We expect about $3.8 billion potential scope for addition to the market capitalization of Tata Motors based on the deal,” said Ambit Capital analysts in a report on Wednesday released before market hours. The broker added, “Going by the nascent stage of the e-PV industry globally (EV penetration globally was just about 5% in CY20) and in particular India (about 0.2% penetration with just 6k EVs sold in FY21 as against domestic PV industry size of 2.7 million units), we factor in a discount of 50% in the valuation of Tata Motors’ stake in EVCo.”
Further, Kotak Institutional Equities and Jefferies India have raised their target price for the stock to Rs 500 and Rs 565 per share, respectively.
Note that Tata Motors’ EV volumes in FY21 stood at 4218 units and its market share was 71%. Tata Motors’ EVCo would be an asset lite entity and house all EV talent and design capabilities. The company plans to expand its portfolio of India-specific products with different body styles and driving ranges to 10 EVs by FY26.
The Tata Motors stock currently trades at Rs 496 on the NSE. After accounting for Wednesday’s sharp gains, the shares have now appreciated as much as 48% in the past five trading days. To be sure, ahead of the announcement, the stock may well have run up in anticipation of a potential investment after reports said that Tata Motors was scouting for investors in its EV business. Meanwhile, even as the company is witnessing a recovery in its various segments, chip shortages are a concern from a near-to-medium-term perspective.
“We cut FY22E Ebitda (earnings before interest, taxes, depreciation, and amortization) by 23% assuming continued chip shortages at Jaguar Land Rover (JLR) in 2H and now expect a consolidated loss in FY22. However, we raise FY23-24E earnings per share by 5% on higher volumes in India; our FY23-24 estimates for JLR are largely unchanged,” said analysts from Jefferies.
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