Weighed down by debt coupled with a negative outlook for the passenger vehicle business Tata Motors' worth nothing without its luxury car business of Jaguar Land Rover, according to a report by CLSA.
The Mumbai-headquartered company has run up a debt of Rs 19,150 crore, which is almost at par against CLSA’s enterprise valuation of Rs 19,200 crore comprising Tata Motors' India business.
"JLR is the only driver of its valuation; we assign zero equity value to the India business. We believe future equity infusions are also likely to be utilised for loss funding and hence we do not attribute any equity value to its India business," analyst Amyn Pirani wrote in the report while also downgrading the stock to 'Underperform' from a 'Buy' rating.
Tata Motors remains one of the handful of automotive companies yet to restart production at its factories even though rivals like Maruti Suzuki, Hyundai, Honda and MG Motor have recommenced output. Hyundai even rolled out 200 cars on the first day.
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Last week, Tata Motors withdrew plans to raise Rs 1,000 crore through the issue of debentures because of 'higher cost expectations from the market' whereas others like Mahindra & Mahindra, TVS Motor Company, Apollo Tyres and Motherson Sumi Systems have successfully raised funds.
"While JLR's net debt/Ebitda should revert to a manageable level of 1.2x by FY22CL, and we forecast India net debt/Ebitda at 12x, which increases the risk of further equity dilution. The increase in leverage is already starting to impact Tata Motors as it recently cancelled a Rs 1,000 crore debenture issue on account of the higher interest cost," CLSA said.
Tata Motors India business comprises the passenger vehicle business (car and SUV) where it is the fourth largest player with a share of 5 percent as of end of FY20. In the commercial vehicle (truck and bus) space the company is the largest player with a share of 42 percent. Both segments will remain under duress for several quarters.
"We believe COVID-19-related demand disruptions will delay Tata Motors' much-needed deleveraging cycle by four to six quarters. We forecast consolidated net debt/Ebitda to increase from 1.1x in FY19 to 4.6x in FY21 despite an equity infusion by Tata Sons. JLR’s cashflow should recover in FY22 but its India business will remain FCF negative," CLSA noted.
Tata Motors is keen to unlock value in the passenger vehicle business for which it is searching for a strategic partner.
While a sale of the India passenger vehicle business and its captive financing arm, Tata Motors Finance, could increase Tata Motors’ equity value by Rs 9,200 crore they are “low probability events” in the current environment, Pirani said.
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