Tata Motors Ltd.

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Initiating Coverage

Tata Motors Ltd. 22-September-2020

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Industry LTP Recommendation Base Case Fair Value Bull Case Fair Value Time Horizon

Automobile Rs 133.5 Buy on dips to Rs 91-93 band and add further in Rs 78-80 band Rs 106 Rs 119 2 quarters

Our Take:

Amidst the COVID backdrop, Tata Motors (TML) management is focused on conserving capital by aggressively curtailing capex spends in FY21E (by over 30%) as well as seeking a strategic partner for the loss-making India passenger car business. Going forward, once business normalises at JLR/India, we expect margins to improve with a rise in share of profitable models. Higher focus towards value-led profitable growth rather than market share along with rationlisation of cost and capex cut could improve efficiency and ensure strong cash flows Also, TML in its recent AGM, had guided about its endeavor to become debt-free in next 3 years; this provides strong visibility of future FCF (free cashflow) generation. While sales are expected to decline in FY21, China as a region is likely to benefit from an early revival. Stimulus package by several major global economies could restrict deterioration in JLR’s financials. To contend with the volatile environment, JLR is reducing breakeven point to 500,000 units through various cost saving initiatives over FY21E. JLR has witnessed good volume pick-up in Q2 particularly Range Rover and Evoque brands along with strong response to newly launched Defender (30k+ bookings) which resulted in gross margin expansion and strong free cash flows. In India, we expect a delayed recovery for the M&HCV segment, where Tata Motors remains dominant with a 50% market share. For the PV business, TML is reducing fixed costs and will focus on improving the (front end) sales experience for customers.

Valuations & Recommendation: TML enjoys immense financial flexibility by its virtue of being part of Tata Group and strong backing from its promoter Tata Sons (infusion of Rs 3,024cr on warrant conversion at a price of Rs 150 in Dec 2019). We expect losses of the company to gradually reduce driven by higher volumes, cost cutting initiatives and better operating leverage. Globally, governments are willing to provide direct/indirect support to the automobile sector (for eg furlough benefit from the UK government), which will benefit JLR. TML is also looking for strategic partners for JLR – it has already entered into a few partnerships with BMW for instance. Significant developments on these fronts could be a potential trigger for the stock price of TML.The India business is behind its peak capex cycle and an improvement in volumes will boost India performance. We feel the base case fair value of the stock is Rs 106 (3.8x FY22E EV/EBITDA) and bull case fair value is Rs 119 (4.0x FY22E EV/EBITDA). Investors can buy the stock in the price band of Rs 91-93 band (3.7x FY22E EV/EBITDA) and add further on declines to Rs 78-80 band (3.5x FY22E EV/EBITDA). At the CMP of Rs 133.5 it quotes at 4.1x FY22E EV/EBITDA.

HDFC Scrip Code TATMOT

BSE Code 500570

NSE Code TATAMOTORS

Bloomberg TTMT IN

CMP Sep 21, 2020 137.5

Equity Capital (cr) 617.79

Face Value (Rs) 2

Eq. Share O/S(cr) 308.90

Market Cap (Rs cr) 49447.3

Book Value (Rs) 134.0

Avg.52 Wk Volume 6,33,40,000

52 Week High 201.7

52 Week Low 63.5

Share holding Pattern % (Jun, 2020)

Promoters 42.39

Institutions 29.00 Non Institutions 28.60

Total 100.0

Fundamental Research Analyst Atul Karwa atul.karwa@hdfcsec.com

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Financial Summary

Particulars (Rs cr) Q1FY21 Q1FY20 YoY-% Q4FY20 QoQ-% FY19 FY20 FY21E FY22E

Total Operating Income 31,983 61,467 -48.0 62,493 -48.8 3,01,938 2,61,068 2,37,328 2,64,512

EBITDA 683 2,858 -76.1 691 -1.2 29,795 23,914 20,833 31,426

APAT -8,441 -3,590 -135.2 -7,094 -19.0 -1,325 -7,922 -10,720 -196

Diluted EPS (Rs) -23.4 -9.7 -135.2 -16.3 -19.0 -3.9 -22.0 -34.7 -0.6

RoE-% -1.7 -14.6 -25.1 -0.5

P/E (x) NA NA NA NA

EV/EBITDA 3.6 5.6 6.5 4.2 (Source: Company, HDFC sec)

Recent Triggers Q1FY21 financials

TML had a tough quarter as both JLR and India business were badly hurt by Covid-19 related lockdowns leading to a consolidated loss of Rs 8,441cr. Consolidated revenues fell by 48% yoy to Rs 31,983cr. Standalone net revenues were down 80% yoy as volumes in the domestic CV business slipped by 90% while realisations improved by 10%. EBITDA margins came in at 2% mainly on account of improved performance of JLR business which posted an EBITDA margin of 3.5%. Standalone business witnessed fourth successive quarter of loss at EBITDA level on account of adverse mix and higher fixed costs. Net loss from joint ventures and associates reduced to Rs 60cr in Q1 as Chinese JV reported PAT break-even in the qtr. JLR Project Charge delivers strong savings TML cost cutting initiatives in the JLR vertical through JLR Project Charge - delivered GBP1.5bn of total savings (cost savings of GBP0.5bn) and cash flow improvement during the quarter. Looking at the robust savings the management has increased its FY21 target further from GBP1.5bn to GBP2.5bn, with remaining GBP1.2b equally targeted between cash and cost savings. Initiated non-core asset monetization process As per reports, TML has initiated the process of selling stakes in units Tata Technologies Ltd and Tata Hitachi Construction Machinery Co. Pvt. Ltd as part of its ambitious plan to turn debt-free in three years.

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Long term Triggers Focus on capital conservation Amidst the COVID outbreak, the Tata Motors management is focused on conserving capital by aggressively scaling back capex spends by over 30% as well as seeking a strategic partner for the loss-making India passenger car business. As the business normalizes at JLR/India (post the COVID-19 outbreak), the cash flows are expected to improve over CY21E (led by working capital reduction). The net debt at JLR has risen to Rs 420bn in FY20 (from Rs 280bn in FY19), impacted by COVID - the debt/EBITDA at JLR is now at 2.9x (vs. 2.3x in FY19). The EBITDA margins have remained range bound at JLR and have declined at the India business, due to the COVID environment. Amidst this backdrop, the OEM is focusing on conserving cash by scaling down capex and accelerating its cost saving programs both in India and overseas. (1) aggregate capex spends to reduce by over 30% in FY21E (expenditure scaled back to Rs 15bn in India vs. Rs 53bn YoY; JLR revised capex is GBP2.5bn vs. GBP3.3bn). At JLR, ~55-60% of the capex is expected to be incurred in H2FY21 and JLR is expected to be cash positive by FY22. JLR’s ‘Project Charge+’ has a target to cumulatively save GBP 6bn by FY21 (GBP 4.7bn of savings delivered to date). This will happen through prioritizing investments, inventory control, lowering warranty costs, minimizing overhead costs etc. Till Q3FY20 the company had saved GBP 2.9bn under ‘Project Charge’ with strict investment prioritization, reduction in working capital and cut in overhead costs and an additional GBP 1.8bn was saved in Q4FY20 and Q1FY21 under ‘Project Charge+’.

GBP bn FY19 FY20 Q1FY21 Total to date

Investment 0.7 1.2 0.3 2.2

Working Capital 0.4 0.2 0.4 1

Costs & Profits 0.2 0.8 0.5 1.5

Total Cash Savings 1.3 2.2 1.2 4.7

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Seeking a partner for loss making India car business Tata Motors is exploring options for a strategic alliance for the domestic PV segment that will provide access to capital, products, architectures and new age technologies. This step will reduce investments/capex required by it. Tata Motors has approved the subsidiarization of the domestic PV business. This is the first step in securing an alliance. The Car segment reported losses of Rs.14bn / Rs 27.5bn in FY19/20. The ongoing downturn and the COVID situation has prompted the management to seek a potential tie up. Tata Motors requires to continually invest in the domestic car segment due to the evolving technology changes, at a time when business conditions are challenging. TML is in the midst of a new model launch cycle, which requires sustained investments. As the local car portfolio is significantly improved (Harrier, Tiago, etc), foreign OEMs could be willing to collaborate with TML. This will reduce the capital intensity for a segment, which accounts for ~5% of its overall global revenues. The segment assets in this business are Rs 168bn ($2.2bn) as of FY20 - the company has taken a write off amounting to Rs 25.7bn for the passenger car business in India. The car business has a refreshed portfolio: Over the last few years, TML has launched a slew of modern products including the Tiago, Tiger. Nexon, Hexa, Harrier and most recently the Altroz and Nexon EV. A fully refreshed BSVI ready product portfolio based on the Impact 2.0 design philosophy, consistently improving NPS scores and an entry into the EV space is reflective of its improving capabilities. To scale its mid single digit market share (~5%) from hereon, TML is seeking a partner. Tata Motors attempted to form alliances with PSA, VW in the past: The company has in the past made a few attempts at forming partnerships with global OEMs. In 2015, it was in talks with French carmaker PSA Peugeot Citroen for a tie up that would have seen Tata manufacturing and producing the cars for the French company from its Sanand factory in Gujarat. The deal did not fructify. Then again in 2017, it signed an MoU with Skoda led Volkswagen Group to jointly develop a small car platform. It was called off after just four months. Further rationale for the decision: Passenger Vehicle business landscape is seeing rapid transformation in the form of tightening emission norms, push towards electrification and enhanced disruptions from autonomous and connected technologies. Additionally, India continues to remain an attractive market, which requires stepped up investments. Mahindra Ford JV has shown the way. With Mahindra collaborating with Ford, Tata Motors is likely to attract potential partners for the Indian market.

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Commercial vehicles segment: Focus on reducing inventory Tata Motors is focusing on controlling channel inventory for the CV segment due to the ongoing downturn. The inventory was reduced by 51k units in H2FY20. The OEM remains the dominant entity in the M&HCV segment, with a market share of 50%. India business outlook: We expect a delayed recovery for the M&HCV business in India – where Tata Motors remains dominant player. For the car business, TML is reducing fixed costs and will focus on improving the (front end) sales experience for customers. Targeting to become debt free in 3 years The management of TML expressed its intent to become debt free over the next 3 years at its FY20 AGM. A recovery in key markets of JLR - the US, Europe, China, the UK - coupled with cost curtailment efforts by the company and lower capex would help the group generate free cash flow at the business level and reduce debt to near-zero level. Besides the company is also looking to sell its non-core assets and infusion of additional equity. JLR, which accounts for ~79% of the company’s consolidated revenues is witnessing strong demand for the recently launched Evoque and Defender. Well-diversified product portfolio across categories, widespread geographical presence TML has a well-diversified product portfolio comprising of presence in CV and PV segment in India. TML has six principal automotive manufacturing facilities in India at Jamshedpur, Pune, Lucknow, Pantnagar, Sanand and Dharwad. By acquisition of JLR by TML in 2008, TML has been able to penetrate premium car markets like US, Europe, UK, China as well as several emerging markets like Russia, Brazil, and South Africa. What could go wrong Delays in stake sale in domestic PV business The recent models launched by TML in the domestic market have been well received. It is looking to sell stake in the PV business on the upside. Delays in finding a partner could derail its debt reduction plans. Delayed economic recovery & CV specific negatives in India Although JLR has witnessed strong pick-up in volumes delayed economic recovery or prolonged slowdown in key markets could result in lower sales going forward. Massive slowdown in luxury car segment or failure of its newly launched models are some other concerns for

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JLR. JLR has also been losing share consistently in Global SUV market over years. It could also face competition from the like of Tesla in the EV segment. Extended sluggish macro environment in India can impact recovery in highly cyclical domestic CV industry. We are 6-8 quarters into the current down-cycle across auto segments in India. On peak to bottom decline, this has been the worst cycle ever for M&HCVs and this segment may recover last. M&HCV segment has been suffering from slowdown in the economy, cost escalation due to transition to BS VI, increase in rated capacity from July 2018, poor growth in freight rates. Also commissioning of Western Dedicated Freight Corridor (DFC) expected over FY22/23 could hit truck demand by shifting some of the demand to railways particularly along that route. Within LCVs post BS-VI there could be a shift away from the <2T segment (dominated by Tata Ace) to 2-3.5T and 3w cargo where Tata Motors has limited/no presence. Deterioration in debt ratios Lower volumes has resulted in negative operating leverage. Consequently debt coverage ratios have deteriorated as evinced by the gearing ratios (excluding finance business) which rose to 0.84x in FY20 against 0.52x in FY19. Adjusted net auto debt /Gross Cash Accruals deteriorated to 4.67x (PY:1.53x). Tata Motors’ net automotive debt is much more than its market cap. Till volumes do not go back to normal, the cash burn may continue and the rising debt would continue eroding into the fair value of equity. Forex volatility TML has sales operations across the globe and volatility relating to forex rates could impact its profitability. Geo political risks Rising tension between India-China could impact TML’s sales from China. Also the trade war between US and China could hinder sustainable recovery in the JLR business. The company derived 20% and 11% of its revenues from US and China respectively in FY20. Other concerns

Major adverse change in government regulation, emission norms, taxation etc continue to be concerns for both global and India business.

Sharp jump in commodity prices could increase the raw material costs for the company.

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It seems JLR expenses only ~30% of its R&D expense through P&L while its peers like BMW expense 70-80% of R&D through the P&L. However a large part of R&D expense is amortized in depreciation expenses.

About the company Tata Motors Limited, a $45bn organization, is a leading global automobile manufacturer of cars, utility vehicles, pick-ups, trucks and buses. Part of the USD 110 billion Tata group, Tata Motors is India’s largest and the only OEM offering extensive range of integrated, smart and e-mobility solutions. It has operations in India, the UK, South Korea, Thailand, South Africa, and Indonesia through a strong global network of 134 subsidiaries, associate companies and joint ventures, including Jaguar Land Rover in the UK and Tata Daewoo in South Korea. With a focus on engineering and tech enabled automotive solutions catering to the future of mobility, Tata Motors is India’s market leader in commercial vehicles and amongst the top four in the passenger vehicles market. It has state of the art design and R&D centres located in India, UK, US, Italy and South Korea. Internationally, Tata commercial and passenger vehicles are marketed in countries, spread across Africa, the Middle East, South Asia, South East Asia, South America, Australia, CIS, and Russia.

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Peer comparision

(FY20) CMP (Rs)

Mcap (Rs cr)

EPS (Rs)

OPM (%)

PATM (%)

RoE (%)

D/E (x)

P/E (x)

P/BV (x)

Ashok Leyland 74.6 21899 1.2 14.2 1.6 4.6 2.1 61.5 2.8

M & M 622.5 77383 -2.2 10.8 -0.3 -0.7 1.6 NA 1.9

Tata Motors 137.5 42458 -22.0 9.2 -3.0 -14.6 1.7 NA 1.0

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Financials Income Statement

Balance Sheet (Rs cr) FY18 FY19 FY20 FY21E FY22E

As at March (Rs cr) FY18 FY19 FY20 FY21E FY22E

Net Revenues 2,94,619 3,01,938 2,61,068 2,37,328 2,64,512

SOURCES OF FUNDS

Growth (%) 9.2 2.5 -13.5 -9.1 11.5

Share Capital - Equity 679 679 720 720 720

Total Expenses 2,57,746 2,72,144 2,37,154 2,16,495 2,33,086

Reserves 94,749 59,500 47,430 36,710 36,514

EBITDA 36,873 29,795 23,914 20,833 31,426

Total Shareholders Funds 95,428 60,180 48,149 37,429 37,233

EBITDA Margin (%) 12.5 9.9 9.2 8.8 11.9

Minority Interest 525 523 619 715 813

Growth (%) -0.1 -19.2 -19.7 -3.6 37.9

Total Debt 77,994 91,124 1,09,953 1,15,871 1,15,871

Depreciation 21,554 23,591 21,425 21,588 22,723

Net Deferred Taxes 6,126 1,491 1,625 1,772 1,931

EBIT 15,319 6,204 2,489 -755 8,703

TOTAL SOURCES OF FUNDS 1,80,073 1,53,318 1,60,346 1,55,787 1,55,847

Product development expenses 3,532 4,225 4,189 4,524 4,750

APPLICATION OF FUNDS

Interest 4,682 5,759 7,243 7,768 7,532

Net Block 1,21,297 1,10,487 1,16,203 1,14,694 1,12,029

Other Income 889 2,965 2,973 2,654 3,291

CWIP 40,034 31,884 35,072 38,579 42,437

PBT, Exceptional items and forex 7,995 -814 -5,970 -10,392 -287

Goodwill 117 748 748 748 -

Exceptional gain/(loss) 1,975 -29,652 -2,871 - -

Investments 20,813 15,771 16,559 17,387 18,257

Forex gain/(loss) 1,185 -906 -1,739 - - Total Non-current Assets 1,82,260 1,58,889 1,68,582 1,71,409 1,73,471

PBT 11,155 -31,371 -10,580 -10,392 -287

Cash & Equivalents 34,614 32,649 26,544 30,464 34,915

Share of profit from JV & associates 2278 210 -1000 -231 188

Inventories 42,138 39,014 37,193 31,697 32,930

Tax (Incl Deferred) 4342 -2438 395 - - Debtors 19,893 18,996 17,881 16,186 16,831

RPAT 9091 -28724 -11975 -10623 -99 Other Current Assets 52,446 57,647 63,412 67,319 73,521

Minority Interest 103 102 96 97 98

Total Current Assets 1,49,090 1,48,306 1,45,030 1,45,666 1,58,196

APAT 6145 -1325 -7922 -10720 -196

Creditors 72,038 68,514 59,366 57,999 62,201

APAT Growth (%) -38.4 -121.6 498.1 -35.3 98.2

Other Current Liabilities & Provns 79,239 85,363 93,900 1,03,290 1,13,619

Adjusted EPS (Rs) 18.1 -3.9 -22.0 -34.7 -0.6

Total Current Liabilities 1,51,277 1,53,877 1,53,266 1,61,288 1,75,820

Net Current Assets -2,187 -5,571 -8,236 -15,622 -17,624

TOTAL APPLICATION OF FUNDS 1,80,073 1,53,318 1,60,346 1,55,787 1,55,847

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Cash Flow Statement

Key Ratios (Rs cr) FY18 FY19 FY20 FY21E FY22E

FY18 FY19 FY20 FY21E FY22E

Reported PBT 13,433 -31,162 -11,580 -10,392 -287

Profitability (%)

Non-operating & EO items -4,049 27,592 1,637 -3,271 -3,761

EBITDA Margin 12.5 9.9 9.2 8.8 11.9

Interest Expenses 4,682 5,759 7,243 7,768 8,235

EBIT Margin 5.2 2.1 1.0 -0.3 3.3

Depreciation 21,554 23,591 21,425 21,588 22,723

APAT Margin 2.1 -0.4 -3.0 -4.5 -0.1

Working Capital Change -15,080 1,419 -3,440 11,307 6,452

RoE 8.0 -1.7 -14.6 -25.1 -0.5

Tax Paid 610 -2,197 -261 146 159

RoCE 4.7 -11.0 3.7 -1.8 4.8

OPERATING CASH FLOW ( a ) 21,150 25,002 15,024 27,145 33,522

Solvency Ratio (x)

Capex -53,358 -5,262 -30,330 -23,586 -23,916

Net Debt/EBITDA 1.2 2.0 3.5 4.1 2.6

Free Cash Flow -32,209 19,740 -15,306 6,167 9,922

Net D/E 0.5 1.0 1.7 2.3 2.2

Investments -475 5,042 -789 -828 -869

PER SHARE DATA (Rs)

Non-operating income 4,049 -27,592 -1,637 3,271 3,761

EPS 18.1 -3.9 -22.0 -34.7 -0.6

INVESTING CASH FLOW ( b ) -49,784 -27,812 -32,756 -21,144 -21,024

CEPS 90.2 -15.1 26.3 35.2 72.9

Debt Issuance / (Repaid) 3,505 13,130 18,829 5,918 0

BV 281 177 134 121 121

Interest Expenses -4,682 -5,759 -7,243 -7,768 -8,235

Dividend 0.0 0.0 0.0 0.0 0.0

FCFE -33,385 27,111 -3,720 4,317 8,691

Turnover Ratios (days)

Share Capital Issuance 28,347 -6,526 40 0 0

Inventory days 52 47 52 47 45

Dividend - - - - -

Debtor days 25 23 25 24 23

FINANCING CASH FLOW ( c ) 27,170 845 11,626 -1,850 -8,047

Creditors days 89 83 83 86 85

NET CASH FLOW (a+b+c) -1,464 -1,965 -6,105 4,152 4,450

VALUATION (x)

P/E 7.6 NA NA NA NA

P/BV 0.5 0.8 1.0 1.1 1.1

EV/EBITDA 2.5 3.6 5.6 6.5 4.2

EV / Revenues 0.3 0.4 0.5 0.6 0.5

Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0 (Source: Company, HDFC sec Research)

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Price Chart

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