Tata Motors-TPG deal unlocks value for EV biz; analysts eye further upside

Tata Motors will remain the dominant player in the EV segment given that the company is first mover in the segment and has created a strong brand among the consumers, say analysts

A ‘surprisingly positive’ investment, worth $1 billion, by TPG Rise Climate and Abu Dhabi’s ADQ in Tata Motors is set to unlock value for the Tata Group company’s electric vehicle (EV) business, say analysts, who view Tata Motors as a "formidable player in the EV space with lack of such launches from competition".  

According to Amit Mishra and Udaykiran Paluri, research analysts at Antique Stock Broking, Tata Group has the most credible plans to promote and develop EV ecosystem in India. Besides, as Tata Motors' Passenger Vehicle (PV) business, including battery electric vehicles (BEVs), has been undervalued by the market, the investment by TPG can potentially unlock significant value, in their view. CHECK TaMo'S GROWTH FORECAST

Tata Motors and TPG Capital entered into a binding agreement on Tuesday, where by TPG Rise Climate along with co-investor ADQ will invest $1 billion (close to Rs 7,500 crore) in Tata Motors’ BEV business. The transaction values TaMo's BEV business between $6.7 and $9.1 billion. READ ABOUT IT HERE

According to the management, the company would invest more than Rs 16,000 crore over next five years. The investors will be issued compulsorily convertible instruments over an 18-month period.

Further, the first round of capital infusion would be completed by March 2022 and all the money will come by the end of 2022.

The wholly-owned EV subsidiary, which the company calls EVCo, will undertake the passenger electric mobility business while the passenger business unit will own the existing assets like manufacturing plants, dealerships, and brands.

Following the development, shares of the company soared 21 per cent to Rs 510 on the NSE in the intra-day trade, as against a 0.94 per cent rise in the benchmark Nifty50 index and the sectoral Nifty Auto index (up 3.4 per cent). In the intra-day trade, the shares had hit a high of Rs 523.85 apiece, up 24.4 per cent.

For Chirag Shah, analyst at Edelweiss Securities, the asset-light model will help Tata Motors reach breakeven point with regards to EBITDA in financial year 2022-23 (FY23) supported by ramp-up in volumes.

"The deal addresses cash flow needs of the EV business for the next five years; while enabling the management to focus on its goal of double-digit market share, high single-digit margins and being Free Cash Flow-positive for the traditional PV business," he says.

A back of the hand analysis by Kotak Institutional Equities pegs Tata Motors’ market share in domestic internal combustion engine (ICE) business around 10 per cent but expects market share in the domestic EV business to come down to 27.5 per cent in FY50 from 71 per cent currently with the entry of existing OEMs into the EV space.

"However, we believe Tata Motors will remain the dominant player in the EV segment given that the company is first mover in the segment and has created a strong brand among the consumers. As a result, we expect Tata Motors’ total revenues to grow by 16 per cent CAGR led by 13 per cent CAGR in volumes over FY21-50. We reckon EBITDA margin in the domestic EV business to gradually improve to 7 per cent in FY30 and to 12 per cent in FY50E. This results in an enterprise value of Rs 90,750 crore ($12 billion) for the domestic PV business," the brokerage said in a report.

That said, analysts remain divided on the valuation front. While a section believes the transaction will set benchmark valuations for Tata Motors’ EV arm, another opines the valuations, as provided by the management, to be "aggressive".

"At the upper end of valuation, $ 9.1 billion implies nearly 9.8x FY24 EV/Sales on our FY24 revenues estimates. This would put the valuation at the upper end of 2-10x EV/Sales range for EV OEMs globally, with Tesla commanding 10x," say Satyam Thakur and Mum Taggu, research analysts at Credit Suisse.

Tesla, they say, re-rated from 2x to 10x only after January 2020 (after XEV penetration in key Tesla markets started moving above 10 per cent).

"Hence, it is too early to assign higher multiples since the inflection in EV adoption for cars in India is still a little far given low public charging infra roll out and low range of cars on sale," they highlighted.

Besides, higher multiples are assigned to OEMs that are "perceived winners". But, given that current EV volumes are small (EV penetration at ~0.5 per cent last month), Thakur and Taggu perceive risk of material possible changes in the market share hierarchy as more OEMs enter the fray.

Motilal Oswal Financial Services, meanwhile, has lowered its target multiple for the PV business to 10x from 12x as any increase in the value of the EV business has a negative connotation for the ICE PV business.