Tata Motors share price down nearly 7% in past 2 sessions: Kotak says SELL, price target Rs 205

Tata Motors reported a strong operational performance in the standalone business, whereas JLR operating performance was below expectations due to lower-than-expected average selling points in 4QFY21. Kotak Institutional Equities believes JLR launches in the BEV space are pretty late than competition and coupled with lower investments could lead to market share loss going forward. JLR is trading at a significantly higher multiple as compared to BMW, which is not justified in our view. Kotak Maintains SELL rating on Tata motors; revised FV Rs 205.

Kotak have increased FY2022-23E consolidated EBITDA estimates by 1-14% largely to factor in:

(1)   higher volume assumptions in the JLR business

(2)   higher EBITDA margin assumptions for the standalone business

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Tata Motors has done well to improve its margin profile led by cost-cutting initiatives both in standalone and JLR operations. As a result, Tata Motors expects net auto debt of the company to reduce from Rs 408.8 bn in FY2021 to Rs 16.5 bn in FY2024E. However, Kotak expects the near term to remain challenging for both JLR (due to chip shortage) and standalone operations (due to the second-wave of Covid-19).

Kotak maintains SELL rating on the stock as they believe the JLR business is trading at expensive valuations (implied multiple of 12.9X FY2023E EPS estimates versus 7.2X for BMW). Kotak believes competition is quite aggressive in the electric vehicle space and JLR will launch its pure electric vehicle much later than competition, which could lead to market share loss. Also, JLR’s investment in the EV space is quite weak as compared to other global players. Kotak’s SoTP-based FV has been revised to Rs 205 (From Rs185) based on 6X FY2023E for the JLR business (15% discount to BMW valuation) and 13X FY2023E EV/EBIT multiple for Tata Motors CV business (in line with Ashok Leyland).

Tata Motors highlighted three key strategies to reach zero automotive debt levels:

(1)   free cash flow generation on account on higher volumes and improving profitability

(2)   divestment of non-core businesses (Tata Hitachi and Tata Technologies)

(3)   equity top-up for the remaining debt amount.

Tata Motors aims to become net cash by FY2025E.