Key takeaway: An improved strategy and cyclical recovery should drive a strong turnaround in Tata’s India business. Tata’s market share losses in trucks are behind, and it is outperforming AL on margins as AL’s earlier cost advantages have faded. Tata is regaining share in PVs, will launch a new SUV in 2HCY21 and is leading in EVs. We retain ‘buy’ at Rs 435 PT with India contributing Rs 200/sh of value. In an optimistic scenario, we see India value rising to Rs 300/sh in 2Y.
Better placed for next truck cycle: Tata lost 11ppt market share in trucks over FY12-18 as Ashok expanded its portfolio and dealer network while enjoying tax benefits at its Pantnagar plant. With a new CV business head in 2017, Tata reworked its strategy, focusing on sales engagement, dealer profitability and servicing. Tata’s share inched up from 50.8% in FY18 to 52.0% in FY21.
Ashok’s Pantnagar tax benefits, conversely, ended in March 2020. Ashok also had cheaper technology for BS4 emission norms, but this advantage has likely faded with the new BS6 norms from April 2020. We find Tata better placed for upcoming CV cycle and is already outperforming Ashok on CV margins.
An improved PV strategy: Tata is also regaining market share in passenger vehicles (PVs) with an SUV-focussed strategy, improved product styling and better brand positioning. Its FY21 market share at 8% was an 8Y high (1QFY22: 10%), and a new sub-compact SUV in 2HCY21 should provide a further boost.
Leading in EVs: While Indian passenger EV market is still nascent, Tata has an early lead with success of Nexon SUV and has ~70% share in EVs. It’s now launching electric variant of its small-sedan Tigor. Tata is also kick-starting the EV ecosystem with group firms: Tata Power setting up charging infra, Tata Chemicals evaluating Li-ion cell manufacturing, Tata Autocomp producing batteries and exploring motors, and Tata Motor Finance providing solutions for fleet EV adoption.
Cyclical recovery ahead: Indian trucks and PVs witnessed their worst downturns of four decades over FY20-21 and are poised for a big rebound. We expect truck industry volume rising 25%/45%/15% in FY22/FY23/FY24; our FY24E volume is still 9% below FY19 peak.
For PVs, we see industry growing 30%/10%/10% in FY22/FY23/FY24.
Big turnaround: We see Tata’s standalone EBITDA rising from average Rs 14billion over FY14-21 to Rs 82-96billion in FY23-24. FY22 should be a net loss, but we expect standalone net profit of Rs 22-34billion in FY23-24. Standalone net debt should fall to Rs 141billion/Rs 101billion by FY23/FY24 versus Rs 170billion average over FY14-21; ROE should rise from -9% over FY14-21 to 12-16% in FY23-24.
India Rs 200-300/sh of value: An improving India franchise should drive much higher standalone value for Tata than in the last decade. JLR is facing chip shortage and EVs concern, but upcoming Range Rover (RR) and RR Sport launches provide catalysts. In our Rs 435 PT, we assign Rs 200/sh (68% of CMP) to standalone at 4.0x FY23E PB (11.5x FY23E EV/EBITDA). In an optimistic scenario, we see standalone value of Rs 300/sh in 2Y at 5x FY24E PB (13.4x FY24E EV/EBITDA). Separation of India PVs into a subsidiary and potential entry of strategic or financial investor can drive further value unlocking.