Tata Motors
BSE SENSEX
35,322
S&P CNX
10,736
31 May 2018
Update
| Sector:
Automobiles
CMP: INR283
TP: INR471(+66%)
Stress Test: How low can the stock price go?
Liquidation value at ~INR256/share; favorable risk-reward at CMP
Buy
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
TTMT IN
2,887
486 / 282
-17/-37/-54
903.1
14.4
3731.0
63.6
Tata Motors’ (TTMT) stock price has been under pressure, particularly since the beginning
of 2018, on account of concerns about the demand environment, the adverse GBP
movement, the noise on trade wars, etc. In CY18 YTD, TTMT’s share price has declined
~34%, as against a 7.8% decline in the BSE Auto Index and around 2.9% upmove in the
Nifty 50. In this note, we evaluate the worst-case scenario liquidation value for TTMT and
more realistic-case downside from current levels. We also highlight the potential triggers
– both positive and negative – that need to be closely watched.
Financials Snapshot (INR b)
Y/E Mar
2018 2019E 2020E
2,946 3,386 3,738
Net Sales
369.7 468.2 537.0
EBITDA
NP
77.8 146.6 179.6
Adj. EPS (INR)
22.9
43.2
52.9
15.7
88.3
22.6
EPS Gr. (%)
281.0 325.4 379.6
BV/Sh. (INR)
RoE (%)
10.1
14.2
15.0
RoCE (%)
6.4
7.4
8.1
12.3
6.6
5.3
P/E (x)
1.0
0.9
0.7
P/BV (x)
Shareholding pattern (%)
As On
Mar-18 Dec-17 Mar-17
Promoter
36.4
36.4
34.7
DII
17.7
17.1
15.5
FII
20.3
21.4
23.2
Others
25.7
25.1
26.6
FII Includes depository receipts
Stock Performance (1-year)
Tata Motors
Sensex - Rebased
650
550
450
350
250
We assess liquidation value at ~INR256/share or ~10% downside from current
level. This is after considering the intangible assets of JLR and India business at
35% of book value (based on 35% capitalization rate v/s JLR’s 80%). While
stocks have traded below their liquidation values in the past, barring any global
macro events, we do not see TTMT sustaining at such levels for a long time.
At ~INR256/share, TTMT would be valued at ~0.9x FY18 P/B, which is close to
its floor P/B valuation of 0.9x in the last 10 years.
Interestingly, even during the Global Financial Crisis (GFC) and worst financials
ever for JLR (EBIT margin of -6.5% in FY09), similar health of India financials
(EBITDA margins at 6.7% in FY09) and negative CFO, the bottom valuation for
TTMT was at 0.9x in 3QFY09.
Coincidentally, JLR’s peers BMW (0.98x) and Daimler's (0.76x) bottom
valuations are also around ~0.87x P/B (ex GFC).
We see the following drivers for the operating performance over 1-2 years:
Demand recovery for JLR, as base normalizes and full benefit of new
launches reflect in FY19.
Continued moderation in realized FX hedge losses in 1HFY19 and FX
starting to contribute positively from 2HFY19.
Lower-cost Slovakia plant supporting profitability.
Apart from above-mentioned visible triggers, the success in the following areas
can act as a re-rating trigger for the stock:
Strong response to its first BEV Jaguar I-Pace.
Efficiency and cost-cutting initiatives at JLR enabling achievement of the
EBIT margin target of 7-9% in the long term.
Strong response in China to locally made Jaguar XE and E-Pace.
Improving competitive positioning in both CV and PV businesses.
Break-even in PV business.
Monetization of non-core assets.
At current price, we see a very favourable risk-reward scenario for TTMT, with
worst-case downside of ~13% and base case upside of ~66%. Key risks to our
thesis: a) persistent weakness in demand environment for JLR, b) trade barriers
impacting competitive positioning of JLR and c) adverse FX movement.
Jinesh Gandhi - Research analyst
(Jinesh@MotilalOswal.com); +91 22 6129 1524
Research analyst: Deep Shah
(Deep.S@MotilalOswal.com); +91 22 61291533/
Suneeta Kamath
(Suneeta.Kamath@MotilalOswal.com); +91 22 61291534
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.