Tata Motors wins binding agreements worth US$1Bn with TPG and ADQ for expansion in the EV industry.

Tata Motors won a binding agreement with PE firm, TPG, and ADQ worth US$1Bn for an 11-15% stake in its newly formed subsidiary, TML EVCo. Post money, the valuation of the new company would stand at ~US $9.1Bn.

The investment will be down in two phases. First 50% will be done by March 2022, post completion of setting up of the EVCo and second 50% by 3QCY22 on accomplishing “Go Live” actions. The investment will be in compulsory preference shares which will later convert to Equity, generating revenue threshold for 11-15% stake.

With this valuation, the revenue and EV penetration estimation would stand at ~9.8x EV/Sales ratio for FY24E. Such high EV/Sales valuation makes the company at par with world EV leaders such as Tesla which commands an EV/Sales of 10x.

However, the right valuation of an EV would be on the basis of strong correlation between EV OEMs’ valuation (EV/Sales) and their revenue growth expectations with the OEMs' market share. Even though Tata Motors does suffice this criterion, it might not be a “winner” just yet in India EV reason being its low volumes and the markets demands hierarchy changes as many players enter the market. Also, the valuation may also stand the test of low public charging infra roll out and low range of cars on sale as the popularity for EV is yet to gain traction from the general masses.

The new venture investment would serve as a boon to the new subsidiary. The company focuses to infuse excess of US$ 2.2 bn over the next 5 years and launch 7 new EV models, EV platform and transitioning from pure conversion models to an adapted platform for EVs gradually. In the 5-year road plan, the company aims to 20% sales from the EV division EV penetration of PVs in double digit. The management aims to achieve EBITDA break even by next year as the contribution margin of EVs is close to rest of PVs for Tata Motors.

The key concerns for Tata Motors still remain with revival of JLR and tackling with the competition in luxury end EV market players such as BMV, Tesla, Merc and Audi. Thus, if the demand persists and grows, it will get more difficult to keep up.

Additional concerns that the company have to tackle would be Brexit, US tariffs, higher than expected incentives, and slowdown of key auto markets its caters to such as US, China and Europe.