Capex of 2.6 bn pounds to be utilized for electrification operations – TATAMOTORS

Update on the Indian Equity Market:

On Wednesday, NIFTY settled lower at 16,204 (-0.1%). POWERGRID (-4.5%), BPCL (-3.2%), and TECHM (-2.2%) were the top losers. TATACONSUM (+3.1%), HINDUNILVR (2.1%), and ULTRACEMCO (+2.0%) were the gainers. Among the sectors, REALTY (-1.8%), PSU BANK (-1.6%), and CONSUMER DURABLES (-0.5%) led the losers. FMCG (+1.3%), PHARMA (+1.1%), and HEALTHCARE (+0.6%) led the gainers.

Excerpts of an interview with Mr. P.B Balaji, Group CFO, Tata Motors with Economic times on 17^th May 2022:

• In terms of capex plans, the company intends to spend Rs 60bn on Tata Motors and 2.6 bn pounds on JLR, which will be utilised for innovations and to prepare the company for the future as the industry transitions from IC engines to an industry of net-zero commitments. Capex will be used by the company for both traditional and electrification-related operations.

• Capex will be funded by internal accruals, and the firm will generate free cash flows of over a billion pounds after spending 2.6 bn pounds on capex. The commercial vehicle business of Tata Motors is cash positive, whereas the passenger car division is cash neutral. The TPG transaction was executed to ensure investments in electrification are made on time.

•  The failure to meet market demand due to the semiconductor shortage is affecting revenues, both at JLR and Tata Motors is expected to result in a loss of contribution, profitability, and operational leverage.
• As far as China lockdowns are concerned, they have impacted the April numbers for all OEMs that were released on 16^th May 2022.
• The Company’s supply chain has not been directly harmed by the Russia-Ukraine war. They have two vendors in the regions that are being diverted.
• Interest rate rises will undoubtedly weaken demand in the future as a result of inflation in fuel, commodities, and food. However, from the standpoint of JLR and Tata Motors, the premium market is not facing that challenge.
• Domestically, the firm hasn’t seen any impact on demand, but it will be watching this closely for the next three to six months to see how the demand plays out.
• Due to commodities, oil, and the resulting fuel price increase, management has begun to identify a risk of greater inflationary expectations, which might harm the premium sector as well as demand in India.
• Due to the commodity cost rise, the company has roughly 200 basis points of unrecovered margins, compared to about 540 basis points previously.
• The company anticipates commodity prices to stay steady at current levels. In April, the company raised its prices. If commodity prices continue to climb, the company will increase prices to protect our margins.
• Lithium costs have risen as demand for electric cars has grown. The company has taken price hikes which are absorbed by the market.  There is a very attractive equation in terms of the running cost of an electric vehicle vis-à-vis a diesel or a petrol car.

Asset Multiplier Comments

• As supply-side concerns ease and commodity headwinds settle, Indian business, which was severely impacted by the second Covid wave, could witness some supply-side recovery. The renewed product range in its PV business is expected to lead to market share gains, and it is projected to achieve FCF breakeven by FY23E due to macroeconomic recovery.
• JLR’s profitability is likely to improve as a result of cost-cutting activities in both variable and fixed costs, improved mix, increased operational leverage, and cost savings from its modular platform.

Consensus Estimate: (Source: market screener)

• The closing price of TATAMOTORS was ₹ 415/- as of 18-May-2022. It traded at 24x/ 11x the consensus earnings estimate of ₹ 17.0/ 36.4/- per share for FY23E/FY24E respectively.
• The consensus target price of ₹ 529 /- implies a P/E Multiple of 15x on the FY24E EPS estimate of ₹ 36.4/-

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”