150% return in 1 year! Brokerages’ gung-ho on this Rakesh Jhunjhunwala owned automaker share - 5 reasons

Tata Motors Ltd has been on investors’ radar amid reasonable valuations, foray into Electric Vehicle space, signs of improvement in JLR volumes, and recovery in India business.

Shares of Tata Motors rallied more than 150 per cent in the last 1 year compared to over 50 percent rally seen in the Nifty50, and over 30 percent gain recorded in the Nifty Auto Index.

See Zee Business Live TV Streaming Below:

On a year-to-date (YTD) basis as well, the stock recorded gains of over 80 per cent much ahead of 26 per cent upside seen in the Nifty50.

Rakesh Jhunjhunwala holds about 1.14 per cent stake in Tata Motors according to June quarter shareholding data valued at Rs 1285.40 cr, according to Trendlyne.

Tata Motors (TTMT) is a leading global automobile manufacturer with a wide range of PVs, SUVs, buses, trucks, pickups, and defense vehicles.

It came under pressure in August amid news of a shortage of chips, but saw a sharp recovery after hitting a low of 268.45 on the BSE as the long-term story remains intact. The stock is now trading above crucial short- and long-term moving averages.

Domestic brokerage firm Motilal Oswal maintains its buy rating on Tata Motors with a 1-year target price of Rs 400 per share, which translates into an upside of over 20 percent from 1 October closing price of Rs 333 on the BSE.

Emkay Global also has a buy rating on Tata Motors with a 1-year target price of Rs 400.

We have collated a list of 5 factors on which analysts at top brokerage firms are positive on Tata Motors:

JLR’s profitability to improve:

Jaguar Land Rover (JLR) profitability will improve amid a recovery in the market and ramp-up in newly launched Defender, Motilal Oswal said in a report.

JLR volumes started to show early signs of recovery from 2HCY19, driven by the new Evoque, a ramp-up in I-Pace, and course correction in China – which first got derailed due to the COVID impact and remains so due to the semi-conductor shortage.

While the semi-conductor shortage is impacting wholesale volumes, retail volumes are seeing good recovery in all of the key markets (reflected in the order book of over 110k units).

In the case of India, the impact is low on the CV business as use is limited and demand is also low. Additionally, JLR should benefit from the ramp-up in Defender.

“We expect JLR (including JV) to post a 13% volume CAGR over FY21–23E (after 13.3% CAGR decline over FY18–21). This, coupled with the possibility of mix improvement and reduced variable marketing spend, would lead to a ~15% revenue CAGR,” added the report.

India business on recovery path:

India business’ recovery was severely impacted by COVID 2.0. Nonetheless, the India CV business is on a strong footing and primed for strong cyclical recovery in both M&HCV (42% CAGR over FY21–23E) and LCV (~21% CAGR).

The management expects 2HFY22 to be better than 1HFY22 and momentum to be maintained over the next 2–3 years.

The automaker aspires for a market share of over 50% in CVs and double-digit EBITDA margins. “For M&HCV, it has gained market share in the last few quarters owing to superior SCR technology and aspires to improve market share to 60% (from 58% currently),” said the Motilal Oswal report.

The report further added that Tata Motors is targeting 15 per cent market share in India PV over the medium term, along with EBITDA margins in the high single digits.

Head start in EV:

India PV has two platforms – viz Alpha Arc (Altroz and Punch) and Omega Arc (bigger vehicles such as Harrier and Safari) – which are scalable and can be electrified.

In India PV, Tata Motors has 70 per cent market share in EVs and thus has a head start in the EV space – the competition is not as geared up, said the Motilal report.

“It plans to launch 1-2 EVs every year by converting existing ICEs into EVs, and would have 10 pure EVs by 2025. It aims to achieve 25% of PV volumes from EVs by 2025,” it said.

Valuation and view:

Recovery is underway in all three businesses of TTMT. While the India CV business would see cyclical recovery, the India PV business would witness structural recovery.

JLR is witnessing a cyclical recovery, supported by a favorable product mix. However, supply-side issues would defer the recovery process.

“While there would be no near-term catalysts from the JLR business, the India business (~50% of SoTP) would post continued recovery. The stock trades at 9.6x FY23E consolidated EPS and 3.2x EV/EBITDA,” highlighted the Motilal Oswal report.

September Monthly Sales:

Tata Motors volume rose 28% yoy to 59,156 units, above the estimate of 51,000 units, owing to higher-than-expected volumes in PVs and CVs.

Domestic CVs grew 30% to 30,258 units. Growth has been higher in MHCVs and ILCVs in comparison to Buses and SCVs. Domestic PVs grew 21% to 25,730 units. The pending order-book is healthy, with 3-5 months of waiting periods for Nexon petrol/diesel models.

Exports grew 81% to 3,168 units. “Q2FY22 total volumes grew 55% to 171,270 units. FY22 volume growth should be robust (30%+), supported by an upcycle in CVs and PVs,” said the Emkay report.

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)