Dramatic change in Tata Motors' domestic biz, analysts give it more weight

Equity value of India business comprised of commercial and passenger vehicles now accounts for over half the value in SOTP calculations as compared to 0-30% two years ago

Tata Motors’ domestic business which was not accorded as much importance by brokerages in the overall sum-of-the-part (SOTP) valuation, has seen a reversal in fortunes.

Analysts have now started giving it a higher weight in the overall valuation as compared to the company’s UK subsidiary, Jaguar Land Rover (JLR). The equity value of the India business comprising commercial and passenger vehicles now accounts for more than half the value in the SOTP calculations as compared to 0-30 per cent two years ago.

CLSA in May 2020 had assigned nil value to the India business. "JLR is the only driver of its valuation; we assign zero equity value to the India business. We believe future equity infusions are also likely to be utilised for loss funding and hence we do not attribute any equity value to its India business," it said in a report. The stock had slipped to Rs 83 after the zero valuation report.

A year on CLSA increased the contribution of the India business to the SOTP to Rs 243 a share in May 2021 or 53 per cent of overall valuations. While the brokerage downgraded the stock earlier this year (January 2022), the contribution of the India business post the downgrade is still at a substantial 63 per cent of the overall equity value.

JP Morgan on the other hand has an overweight stance on the company.  “We value the India business at Rs 319 per share and JLR at Rs 310 a share,” wrote Amyn Pirani and Vaibhav Zutshi of the brokerage in a report dated February 16, 2022. The brokerage’s bull case fair value of Rs 783 a share factors in TPG's valuation for the India PV (electric vehicle segment) and the management guidance of 10 per cent EBIT (earnings before interest and tax) at JLR by FY26.

While the TPG investment in the company bumped up valuation of the domestic business, a sustainable operational performance of both the passenger and commercial vehicle added further heft, bolstering investor confidence.  

The turnaround of the businesses had taken effect much before the company announced the investment by the private equity firm in October 2021. The structural strengthening of JLR and India businesses coupled with the company staying the course with its de-leveraging targets has also helped.

The upgrades in the last four quarters are premised on the fact that a combination of rising scale at JLR along with cyclical uptick in domestic truck business and continued market-share gains for PVs will drive significant free cash flow generation. This may lead to Tata Motors turning net debt free by FY24.

A majority of the domestic brokerages, have also been assigning higher value to the domestic business. HDFC Securities, Motilal Oswal Research, Prabhudas Lilladhar Research, ICICI Direct, Elara Capital among others, have been assigning greater value to the domestic business for the last three to four quarters.  ICICI Direct now values the India business at Rs 395 which is 63 per cent of overall valuations as against Rs 20 a share in October 2019 which was 10 per cent of overall valuations.

The Tata Motors stock has gained 62 per cent over the past year and is currently trading at Rs 494.7 apiece.