Is Tata Motors facing a downhill ride after 160% gain in 2021? CLSA thinks so

Tata Motors Ltd was one of the top-performing stocks of 2021, clocking a massive 160% gain that far exceeded the 22-24% rise in benchmark indices. But the juggernaut may have now come to a halt.

Hong Kong-based investment advisory firm CLSA on Tuesday downgraded Tata Motors, India’s largest commercial vehicle (CV) maker, to ‘sell’ from ‘buy’ with a target price of Rs 408 per share compared with Rs 450 apiece earlier.

Tata Motors shares fell 2.5% to Rs 484 apiece amid high volume, before paring the losses. The stock had risen to a high of Rs 536.50 in November last year, from Rs 185 at the start of 2021, but has slipped almost 10% since then.

CLSA opined that Tata Motors’ passenger vehicle business is overvalued given its lower-than-anticipated market share versus peers. Besides, its UK subsidiary Jaguar-Land Rover (JLR) is treading the electric vehicle ramp-up slower than its competitors.

“Our new Rs 408 target price (previously Rs 450) implies a 15% downside. Our valuation is based on Rs 150 per share for the CV business, Rs 151 for JLR and Rs 99 for its domestic PV business,” said Hitesh Goel, executive director, CLSA.

Domestic PV, EV business

CLSA begs to differ from the street on the valuation of the domestic PV business of Tata Motors. It believes the valuation of $9.1 billion ascribed to it by a PE fund (TPG Growth) for Tata Motors’ EV business is too high.

“We value Tata Motors EV business at $5 billion assuming Tata Motors’ market share in the domestic PV segment increases from 12% in FY22 to 16% by FY50, and profitability remains elevated till FY50,” said Goel.

Maruti Suzuki India Ltd’s passenger car business, which has a market share of 44%, commands an enterprise valuation of $20 billion.

Tata Motors’ passenger car business has an inferior cash flow profile to Maruti, and hence gets a lower valuation of $5.8 billion.

JLR volume and profitability

CLSA expects a sharp improvement in volume for JLR (20% CAGR over FY22-24) versus expectations of mid-teen volume growth in global automotive demand as chip shortages ease.

“JLR has over 125,000 bookings and very low inventory, which explains our optimism,” said Goel. “However, we would note that most of this growth in auto volume will likely come from EV and hybrids and JLR does not have any launches in battery EVs till 2024, which could pose a risk to our volume estimate.”

CV business in a sweet spot

CLSA believes Tata Motors’ domestic CV business will post strong growth over the next three years and expects the company to gain market share. It ascribed a value to the CV business at $9.3 billion versus the valuation of $5.9 billion for Ashok Leyland Ltd.

Debt to decline

Tata Motors has committed to restricting its investment in JLR. And given that profitability will improve at JLR, one can forecast a sharp reduction in its net auto debt at the consolidated level, mainly for JLR’s operations, CLSA said.