Tata Motors may struggle on growth, synergy fronts with Iveco buy

The  stock of Tata Motors is down about 4 per cent over the last two trading sessions on concerns related to the $4.35 billion (₹38,000 crore) acquisition of Italian commercial vehicle (CV) major Iveco. The Street is worried about the sluggish growth outlook for CVs in Europe, increase in debt for the consolidated entity, the higher cost of operations at the European plant and lack of synergies. The valuation of the deal is, however, reasonable at 2 times enterprise value to operating profit on CY24 figures. 

Tata Motors says that the acquisition combines a large product and engine portfolio, diversifies its exposure to markets and segments which will reduce cyclicality on cash flows and create operational synergies. ICICI Direct Research, however, says that it does not see any strategic fit for Tata Motors from this acquisition and expects it to strain its automotive balance sheet that has recently turned net debt free. 

The company is raising 3.8 billion euros to fund the acquisition with about a third of the same being funded by equity and the company will raise debt for the rest. Tata Motors had a consolidated gross debt of ₹71,450 crore (though net debt is not significant) and a debt to an equity ratio of 0.62 times as on March 31, 2025. 

The company expects the Indian and the Italian CV company to remain free cash flow positive, reach earnings breakeven in two years and repay acquisition debt in four years. In addition to free cash flows, the company is eyeing the monetisation of the Tata Capital stake to repay the debt over the next four years. 

For the merger benefits to come through, a lot will depend on the growth outlook for the European operations as well as the ability of the acquired entity to bring down its operational cost. 

 

Multiple quarters of weak economic growth in key markets of the EU, slow order intake and demand uncertainty could result in another weak year for CVs after a muted CY24. New commercial vehicle registrations for the three main categories of vans, trucks and buses in the first half of CY25 saw a drop of 13.2 per cent, 15.4 and 4.4 respectively over the year ago period. The European Automobile Manufacturers’ Association pointed out that the first half of 2025 proved challenging for the EU's commercial vehicle market, marked by significant registration declines in key markets, amidst an already challenging economic context. 

Given growth worries, the ability to improve cash flows (by reducing operating cost) at Iveco will be tough. While the operating profit margins of Tata Motors (CV) and Iveco are the same, higher depreciation and amortisation costs results in a 370 basis points lower margins for the Italian major as compared to the Indian company. 

This could be a challenge though Tata Motors believes that higher operating leverage and synergies will help spread the investments over larger volumes improving the margins. While the valuations are reasonable, Nuvama Research too points out that the key downside risk is the possibility of a sales down cycle in EU CVs. 

An analyst at a foreign brokerage believes that it will be tough for Iveco in the current environment to bridge the margin gap with market leaders such as Daimler, Volvo given the low market share in trucks and the lower margins in light commercial vehicles where Iveco has decent share. Given the lack of synergies, a change in ownership may not result in operational gains for the Italian automaker, believes the analyst.