Valuation surge

Turnaround in Tata Motors is driving share prices

The market capitalisation of Tata Motors briefly overtook that of Maruti Suzuki India Ltd (MSIL) last week, making the Tata company the most valuable listed automobile company in India. The share price of MSIL has since gained enough to recover top position. The movements in these two shares illustrate an interesting quirk in valuation. While share prices are indeed tied to prospects of profits, investors are usually prepared to bet more on a possible turnaround in a loss-making company than in a business that’s already doing well. In the past 12 months, MSIL’s share has gained 19.6 per cent while Tata Motors (share with voting rights) and Tata Motors DVR (differential voting rights) have gained 99 per cent and 160 per cent, respectively. Tata Motors is now valued at roughly Rs 3.10 trillion while MSIL has a market capitalisation of Rs 3.34 trillion.

Both have overseas exposure. In MSIL’s case, this is due to the Japanese promoter, which means imported components, dividends, and other payments to the promoter. Movements in yen-rupee rates have a bearing on its financials. In Tata Motors, however, external exposure is much larger than the domestic business. The overseas subsidiary, JLR (Jaguar Land Rover), has a larger balance sheet and far more revenues than standalone Tata Motors. The standalone business contributes only 28 per cent of consolidated revenues. MSIL has been consistently profitable and retains over a 40 per cent market share across all segments of the passenger-vehicle market. In FY22, MSIL reported net profits of Rs 3,770 crore on revenues of Rs 88,300 crore and it reported net profits of Rs 8,050 crore on revenues of Rs 1.2 trillion in FY23. While MSIL has improved margins, demand in the key small car segments where it has a dominant presence is down.

Tata Motors has a presence across many domestic segments including trucks and other commercial vehicles, as well as passenger cars, where it is usually at number three on unit sales. But it has struggled for years. In FY22, consolidated net losses amounted to Rs 11,308 crore on revenues of about Rs 2.8 trillion and it turned net profits of Rs 2,689 crore on revenues of Rs 3.5 trillion in FY23. In FY24, it promises to see a surge in profitability based on a strong revenue expansion, better margins, and higher volumes for domestic and overseas sales. Analysts say it could report over Rs 21,000 crore consolidated net profits on revenues of roughly Rs 4.3 trillion. Margins for JLR will be better than domestic margins, going by the last nine months.

Like all auto companies, both suffered from semiconductor shortages, high commodity prices, and disrupted supply chains during the past three financial years. But both managements seem to think these issues have been overcome. MSIL’s growth rate is being impacted by the changing demand pattern, which has been apparent in the recent past while Tata JLR will gain from gradually improving global demand as well as a presence in the domestic commercial vehicles and mid/high passenger segments. Tata has also made significant gains in the electric-vehicle market. The difference in share-price performance between MSIL and Tata Motors is worth noting. This rerating phenomenon where the valuation of a loss-making company spikes on a turnaround is very often seen in cyclical sectors. Sustaining the new level of valuation would depend on sustained financial performance.