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Equity Research Report: Tata Motors

With a focus on EV transition, JLR reimage, cost control, deleveraging, and buoyant domestic operations, Tata Motors may scale 540-648 by FY: 24-25

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Tata Motors Ltd. (TML) is an Indian MNC, a $37B organization, is a leading global automobile manufacturer of cars (PV/CV), utility vehicles (UV), pick-ups, trucks, buses, luxury cars, sports cars, construction equipment, and defensive vehicles. Part of the $128B Tata group, Tata Motors is India's largest and the only OEM offering an extensive range of integrated, innovative, and e-mobility solutions. It has operations in India, the UK, South Korea, Thailand, South Africa, and Indonesia through a strong global network of 86 subsidiaries in 175 countries, 10 associate companies, 4 joint ventures, and 2 joint operations as of 31^st March’22.

With a focus on engineering and tech-enabled automotive solutions catering to the future of mobility, Tata Motors is India's market leader in commercial vehicles and amongst the top four in the passenger vehicles market. In fact, in July’20, Tata Motors became the 3^rd largest automobile company in India in terms of total units/vehicle sales (after Maruti and Hyundai).

TML offers automotive products, ranging from sub-one-tonne to 49-tonne Gross Vehicle Weight (GVW) trucks, small, medium, and large buses and coaches, and passenger vehicles. TML is the leader in India’s CV market with a market share of 45.1% and sales of 4,68,788 vehicles in FY 2018-19 and has gained market share in the Medium and Heavy Commercial Vehicle (MHCV), Intermediate Light Commercial Vehicle (ILCV) and Small Commercial Vehicle (SCV) segments.

With 'Connecting Aspirations' at the core of its brand promise, the company's innovation efforts are focused to develop pioneering technologies that are sustainable as well as suited to evolving aspirations of the market and the customers. Tata Motors strives to bring new products that fire the imagination of GenNext customers, fueled by state-of-the-art design and R&D centers located in India, the UK, the US, Italy, and South Korea. Internationally, Tata commercial and passenger vehicles are marketed globally, spread across Africa, the Middle East, South Asia, South East Asia, South America, Australia, CIS, and Russia.

In FY22, almost 70% of Tata Motors' revenue comes from outside India, led by the U.S., U.K., rest of Europe, and China. Overall, on average, over 80% of revenue comes from outside India. Almost 67% of Tata Motors' revenue comes from JLR and 32% from Tata Motors India (standalone).

Key management:

Board Members:

Key Shareholders: Tata Sons (promoters)

Summary of latest report card: Q1FY23 (Consolidated)

·         Operating revenue Rs.71.935B vs 78.439B sequentially (-8.29%) and 66.406B yearly (+8.32%)

·         Operating expenses Rs.73.302B vs 74.078 sequentially (-1.05%) and 64.697B yearly (+13.30%)

·         EBITDA –Rs.1.367B vs 4.361B sequentially (-131.34%) and 1.710B yearly (-179.96%)

·         Interest expenses Rs.2.421B vs 2.381B sequentially (+1.69%) and 2.203B yearly (+9.87%)

·         Core operating profit (EBTDA=EBITDA-INTT) –Rs.3.788B vs 1.981B sequentially (-291.21%) and –Rs.0.494B yearly (-667.14%)

·         Core operating EPS (EBTDA/Share) -9.89 vs 5.17 sequentially (-291.20%) and -1.29 yearly (-667.14%)

·         Core operating margin -5.27% vs +2.53% sequentially and -0.74% yearly

·         EBITDA margin -1.90% vs +5.56% sequentially and +2.57% yearly

Overall, Tata Motors reported a terrible report card for Q1FY23; as per the Indian GAAP accounting system, both at EBITDA and EBTDA levels, although the company is showing positive EBITDA in their Investor presentation as per the Ind-AS accounting system. An audited financial statement is as per the usual Indian GAAP accounting system. Tata Motors reported only two-quarters of positive core operating profit in Q4FY22 and Q3FY22 out of the last five quarters as per the Ind-GAAP accounting system.

Tata Motors P&L account for last 10 years as per Ind-GAAP accounting system:

Highlights of analyst concall and presentations: Q1FY22

·         Volumes are constrained by ongoing semiconductor shortages, slower than expected new Range Rover / Range Rover Sports volume ramp up, and China Covid lockdowns

·         Retails flat QoQ; wholesales down by 6% compared to the prior quarter as a result of production constraints

·         Order bank grows further to around 200,000 units

·         EBIT margin decreased to (4.4)% reflecting lower wholesales, and weaker product mix (New Range Rover & New Range Rover Sport ramp up)

·         Loss before tax of £(524)m, excluding an exceptional £155m pensions benefit but including £(236)million unfavorable FX and commodity revaluation year on year

·         Refocus continues to drive value generation of £250m in Q1

·         Free cash flow of £(769)m in the quarter primarily due to the working capital outflow of £(616)m

·         Total cash was £3.7b on 30 June 2022. Current available liquidity of £5.2b including undrawn RCF of £1.5b from July 2022

·         Higher retails in the UK and Europe QoQ offset by decreases in other markets

·         Wholesales are lower in most markets, up in Europe

·         Weak Q1 profitability reflects volume & mix, inflation, cross currency/FX/commodity headwinds

·         Lower volume & mix due to chip supply, RR/RRS ramp up, China lockdowns

·         Cash flow breakeven remains around 300k to 350k wholesales

·         Total Q1 investment £489m

·         Engineering capitalization rate 25% - will increase as new products reach capitalization triggers

·         Looking ahead:

·         Production constraints expected to improve in Q2

·         Improved visibility of chip supply and production ramp-up of new Range Rover & Range Rover Sport

·         Enhanced engagement including partnership agreements with key suppliers is improving the visibility of chip supply

·         Expected higher production of New Range Rover in Q2

·         Reduced impact of COVID lockdowns in China

·         Wholesale volumes are expected to improve to around 90K in Q2

·         Strong demand continues – record order bank of 200K units

·         New Range Rover, New Range Rover Sport & Defender account for over 60% of order bank

·         Focus on cost control amid data-led pricing decisions, optimization of raw material costs

·         Taking various steps to beat significant inflation headwinds

·         Have adequate pricing power

·         PRIORITIES AND OUTLOOK FOR FY23-JLR

·         Improved visibility of chip supply through senior supplier engagement including partnership agreements combined with the ramp-up of new Range Rover and new Range Rover Sport

·         Improving wholesales in Q2 (~ 90k) and continuing over the financial year

·         Refocus savings, including price increases, of £1bn+ to offset cost inflation

·         Aim to deliver a significant positive EBIT margin (5%) and positive free cash flows (£1b) in the full year

·         Aim to deliver a significant positive EBIT margin (5%) and positive free cash flows (£1b) in the full year

·         LONGER TERM TARGETS-JLR

·         Reimagine, our strategy to deliver the future of modern luxury to our clients and to achieve net zero carbon emissions across the supply chain, products and operations by 2039, continue at a pace

·         Free cash flow improvements with near-zero net debt in FY24

·         EBIT margin to double digits by FY26

·         CV market share at 42.5% in Q1FY23 vs 44.9% in FY22 and 42.4% in FY21

·         CV- Strong YoY growth owing to increased activity in road construction, mining, and growth in agriculture and e-commerce

·         CV- Stable commodity prices support margins despite lower QoQ volumes

·         CV-bright spot, but higher USD vs local currencies and political turmoil in some countries like Sri Lanka is a headwind along with higher fuel prices and higher borrowing costs

·         Electric mobility such as Electric buses is a focus area

·         PV (Passenger Vehicles)-sustained volume growth and actions underway to enhance capacity and debottlenecking supply to grow further

·         PV-EV is showing the encouraging sign, having the highest quarterly sales

·         PV-EBITDA 6.1%; PBT at breakeven

·         PV Industry-In Q1, Industry wholesales increased 41% YoY as semiconductor supplies improved

·         SUV market share around 40% with number 1 position

·         PV market share is around 14.3%

·         EV market share 88%; posted highest ever EV sales in Q1FY23 at 9310 units

·         Bright spots:

·         Industry projected to grow to ~3.5M in FY23

·         Demand for SUVs and EVs continues to remain strong

·         Robust booking pipeline and low channel inventory

·         Strong traction for CNG continues

·         Car supplies will improve with better semiconductor availability

·         Strong rural demand is expected on the back of a good monsoon

·         Nexon EV Max augmenting the EV demand; supplies to improve in Q2

·         Challenges:

·         High inflation and interest rate may impact auto demand adversely

·         Seasonality might start impacting as pent-up demand wanes

·         Focused demand generation activities with segment level and micro-market focus

·         Enhance supplies further as semiconductor availability improves

·         Fast track cost reduction efforts to improve profitability

·         Stated free cash flow for Tata Motors (India) –Rs.2.893B

·         Investment spending/Capex in Q1FY23 at Rs.1.1B

·         Projected FY23 capex Rs.6B

·         Looking ahead:

·         Remain committed to consistent, competitive, cash accretive growth whilst deleveraging the business

·         Demand to remain strong despite worries about inflation, and the geopolitical situation.

·         Chip supply to improve further from Q2; Cooling commodity prices to aid improvement in underlying margins

·         Aim to deliver strong improvement in EBIT and free cash flows from Q2 onwards

·         JLR priorities:

·         Debottleneck supply constraints to deliver volume-led performance improvement with Q2 at ~ 90k

·         Implement price increases and Refocus actions to recover cost inflation

·         Successful launch and deliveries of the New Range Rover and Range Rover Sport

·         Achieve a 5% EBIT margin and £1bn positive free cash flows in FY23

·         Tata Motors priorities:

·         CV:

·         Continue to grow market shares across segments

·         Restore double-digit EBITDA margins

·         Successfully launch and drive the penetration of new business models

·         PV:

·         Continue to deliver market-beating growth

·         Sustain profitability and cash flow improvement measures

·         EV:

·         Invest proactively to step-up EV penetration with exciting new launches and accelerate the creation of the ecosystem

·         The stress of implementation of Federal and State government Smart Mobility Solutions

·         Focus on EV portfolio led by Nexon-EV prime and JLR Defender 130

·         Q1FY23 was affected by semi-conductor shortages, lack of adequate production volume for Range Rover and Range Rover Sport, China’s COVID disruptions, and cross currency headwinds led by GBP

·         The company has no concern about demand at retail levels

·         FCF for JLR will be improved into positive territory in the coming quarters

·         The higher debt burden is primarily due to the higher requirement for working capital

·         JLR has strong liquidity of over £5B+ (cash in hand £3.7B+£1.5B revolving credit facility)

·         Sales in North America and China were down significantly due to a lack of sufficient Range Rover and Range Rover Sport models in Q1FY23 amid transfer to new production facilities and semi-conductor shortages

·         FX and commodity hedging loss also contributed to an overall loss

·         Pending order books for Range Rover, Range Rover Sport, and Defender is robust

·         We are starting to break through the production issues, and they are starting to be light at the end of a very long tunnel on supply and semiconductors as well

·         Focus is now also on a new Defender model of 8S, expected to be very popular in the U.S. and some ME countries

·         JLR Q1FY23 operating expenses was boosted by higher energy and semiconductor cost, while dragged by lower commodity prices (sequentially)

·         JLR is in the process to ramp up production to meet demand; aims to produce 90K units in Q2 with the right product mix

·         FY23 guidance is unchanged for JLR despite subdued Q1FY23: 90K units; 5% EBIT margin and £1B positive cash flow; FY24 aspiration 7%+ EBIT margin

·         Tata Motors (India)

·         Crossed the milestone of 45K monthly sale

·         EV market share remained strong at 88%

·         Number one position in SUV led by Nexon

·         Signed a tripartite agreement/MOU with the Gujrat Government and Ford motors for the potential acquisition  of Ford’s Sanand vehicle manufacturing facility (to further strengthen the supply side)

·         Total 40K EV customers as of Q1FY23

·         Robust booking pipeline and low channel inventory

·         Good traction for CNG models also

·         Rural demand strong amid a good monsoon

·         Tremendous demand for Nexon-EV Max

·         Inflation (higher fuel costs) and higher borrowing costs also impact overall car sales

·         Aiming to ramp up production and fast-track cost reduction to improve profitability

·         Confident that M&HCV business will be back on track in coming quarters amid the return of demand and launch of various new models

·         Expecting cost savings on the commodities front in a sustainable way

·         Confident about ramp-up of production for around 90K units of RR/RR-Sport/Defender with a profitable mix in Q2CY23

·         Weak GBP is a headwind

·         Likely strong sustainable demand from small fleet/single vehicle owners as the sentiment index is still robust, which is an indication of interest from both large as-well-as small fleet operators

·         M&HCV volume was affected sequentially due to general economic slowdown, higher borrowing costs, and inflation/higher fuel costs, but there was an improvement in margin

·         We will remain focused on EV in a balanced way along with hybrid models for the Indian market

·         Most of the EV models would be 20-25% premium to existing petrol/diesel/automatic/hybrid model

·         Currently have quarterly contracts for steel prices instead of half yearly because of underlying volatility

·         Incremental infra spending by the government should help the M&HCV segment

·         The company is watching carefully the price difference between diesel and CNG for a suitable portfolio mix

·         The company has adequate pricing power

·         India/domestic market share for PV was around 14.3% in Q1FY23 vs 13.4% in Q3FY22

·         India-PV market share for FY22 was 12.1% vs 8.2% in FY21 and 4.8% for FY20 and 6.3% in FY19.

Huge legacy debt is a big issue for Tata Motors, primarily for the JLR M&A and to finance expansion/diversification/R&D operations. Over the last 10 years (since FY13), total debt has increased from Rs.43.722B to Rs.139.877B in FY22; i.e. an increase of around +220%, while operating revenue increased from Rs.188.818B to Rs.278.454B; i.e. an increase around +47%. On average, operating revenue is increasing by around +5% over the last 10 years, while debt is increasing by around +14%. Thus debt is increasing at a much faster rate than operating revenue and is not sustainable, affecting the bottom line (core operating profit).

The debt profile will only improve on higher sequential EBITDA and FCF (free cash flow); i.e. the debt-laden company is now being able to finance its working capital/operations on its own. Thus going ahead, we may see a sequential reduction in debt amid prudent capex management. Tata Motors, like Tata Steel, is now also emphasizing deleveraging and promised to be net automotive debt free by FY24. In his Annual Report for FY22 statement, TML/Tata Sons Chairman Chandrasekaran said:

“Tata Motors Group is now operating as three independent business units of Commercial Vehicles, Passenger Vehicles, and Jaguar Land Rover, offering differentiated value propositions to their different customer segments whilst leveraging backend and corporate synergies where possible. This has made Tata Motors lean, nimble and customer-centric. Each of these businesses is self-sustaining which gives me the confidence that we will get to near zero net automotive debt by FY24.”

Although being a part of Tata Group Company, debt raising and refinancing at attractive rates is not an issue for TML, any meaningful deleveraging by FY24 in line with over-group policy maybe also a trigger for the scrip. Another issue for TML is efficient/effective FX hedge issues as it operates in almost 5 different currencies and reports in INR.

In any way, a subdued report card for Q1FY23 was also in line with the guidance provided by the company in the Q4FY22 investor presentation/analyst concall amid supply chain constraints for China COVID lockdowns, Russia-Ukraine war, commodity inflation, new RR model changeover (production constraint). Tata Motors had also stressed normal/improved operations from Q2FY23 and guided +5% EBIT margin along with £1B+ positive FCF in FY23 for the full year. Further Tata Motors continues to target improving EBIT margin (as per their IND-AS accounting system) to double digits by FY26 and improving cash flow to achieve near zero debt by FY24.

In FY23, Tata Motors continues to engage with tier-1 and chip suppliers to increase the supply of chips and mitigate other supply chain disruptions; will refocus on cost savings of £1B to offset cost inflation and also go for the price increase and will successfully launch & delivers of new RR/RR-Sport model (for JLR). For CV (Commercial Vehicles) –India operation, stress will be on Electric buses amid increasing demand from governments, various PSU & private organizations.

The Indian PV market is projected to grow and surpass the FY19 peak amid increasing demand for EV and CNG models along with an emphasis on the old vehicle scrapping policy. Bright spots-robust booking pipeline, low channel inventory, the strong response continues for SUVs (Nexon model), and Tiago & Tigor i-CNG models. Risk remains in constrained chips/other RM supply and commodity inflation.

Pros:

·         Strong policy support –both local and global for EV transition

·         Reimage & refocus strategy for JLR

·         Deleveraging/de-amalgamation between JLR and TML; JLR may be listed separately in Europe/U.K. in future

·         Indian government focus on infra spending

Cons:

·         High cost of vehicle ownership in India

·         Lack of basic EV/CNG infra

·         High cost of EV (almost double than conventional Petrol/Diesel model)-not affordable for middle-class buyers

·         High cost of Petrol/Diesel

·         High inflation/cost of living is affecting discretionary spending like buying a car

·         Higher borrowing costs

·         GBP devaluation/cross currency headwinds/volatility

·         High debt or interest/EBITDA (%)

·         FX and Commodity hedge headwinds

Although TML's domestic (India) operation is not very significant, considering its overall size and JLR, in the past few years, TML has launched various models in the PV/CV segment and now the TATA brand is very much visible in the Indian road (PV/CV-Ola/Uber) along with Maruti, which has a market share of more than 50%. In brief, TML is now out of its decade-old ‘Indica’ legacy and is now more acceptable to the general public along with cab aggregators (Ola/Uber).

One of the problems in the Indian automobile market is the high cost of owning a vehicle in the CV/PV segment. In a metro city, it’s now more convenient or affordable to hire and go for Ola/Uber rather than keeping/maintaining your vehicle. But now even Ola/Uber owners are now unhappy with continuing their business because of extremely high operating costs (like insurance costs, road tax, higher borrowing costs from NBFC, etc.). In a metro city, it’s now more convenient or affordable to hire and go for Ola/Uber rather than keeping/maintaining your vehicle.

TML was also reportedly accused of coercing dealership strategy, but at the same time, the company is also rapidly expanding its dealership network. TML has a very competitive pricing strategy (value for money) compared to its peers. In FY:20-22, apart from automobile chip shortage issues,  production & sales from dealership points have been impacted significantly due to COVID disruptions.

But despite so many local and global headwinds, TML may have good earning visibility amid the rapid transition to EV. In brief, TML is now an example of a good business model in temporary distress. Thus any major dips/volatility may be a good opportunity to invest for the medium/long term for this Tata Group Company.

Fair Valuation: Rs.450-540-648 by FY: 24-26

Overall, Tata Motors management is quite confident about robust demand and adequate supply to meet that demand in the coming days. This, along with the thrust on EV/smart mobility, limited impact on supply chain issues for lingering Russia-Ukraine war, strong order book, synchronized global stagflation/economic slowdown, and higher borrowing costs, Tata Motors is expected to report core operating EPS at FY21 levels around 25.00 by either FY23 or FY24. Then considering 20% CAGR on average Tata Motors may report core operating EPS around 30.00-36.00-43.20 by FY24-26. Assuming an average core operating PE of 20, the projected valuation should be around 450-540-648 by FY: 24-26.

For Tata Motors, pre-COVID (FY18) was the best year in the last 10 years, in which it clocked an EBITDA of Rs.34.526B and EBTDA of Rs.29.845B after paying net interest of Rs.4.7B. Now in FY22, the EBITDA was around Rs.10.323B, interest Rs.9.312B, and EBTDA Rs.1.011B. For FY21, EBITDA was Rs.19.438B, interest Rs.8.097B and EBTDA Rs.11.341B.

Core operating EPS of Tata Motors was Rs.2.64 (FY22); 29.62 (FY21); -18.79 (FY20); -2.22 (FY19); 87.88 (FY18); 74.65 (FY17); 44.53 (FY16); 58.94 (FY15); 51.47 (FY14) and 33.86 (FY13). Tata Motors was a victim of the Trump trade war (Chinese slowdown) followed by COVID disruption.in FY20/21. In FY22, Tata Motors was affected by lingering chip and other RM supply chain disruptions (due to COVID and Russia-Ukraine war), recurring COVID lockdowns in China (under zero COVID policy), higher inflation/higher cost of living/reduced discretionary spending), and higher borrowing costs. Now Tata Motors is expecting almost normalized operations from Q2FY23 as the pandemic has turned into endemic globally, China is also limping back to normal condition, which may lead to not only higher demand for JLR, but also the resolution of supply chain disruptions.

Although overall automobile sales plummeted around 33% in FY22 from FY19 (pre-COVID) levels in India due to COVID disruption and high cost of vehicle ownership, we may see some rebound in this festive season, upcoming state election, and Federal election in 2023-24 and gradual transition for EV/old vehicle scrappage policy. The Government also needs to focus on the lower cost of vehicle ownership to encourage the industry & related direct/indirect employment.

 

 

 

 

Technical View: Tata Motors

Looking ahead, whatever may be the narrative, technically Tata Motors now has to sustain over 460 for higher targets; otherwise sustaining below 450, it may fall in line with below levels.

Financial (P/L) account analysis: Tata Motors (Consolidated)

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