The Tata Motors and TPG deal is surprising and positive for TTMT as: (i) TPG is ascribing a worth of $6.7–9 bn to TTMT’s India passenger EV business—merely 1k unit sales in Sept-21 (ii) it addresses money flow wants of the EV organization (>Rs 160 bn) for the next 5 years and (iii) the standard PV organization can focus on its objective of double-digit industry share, higher single-digit margins and getting FCF-positive.
We had earlier argued that old-line OEMs have come a extended way in developing capabilities when valuations are stuck in the slow lane, implying a substantial solution worth. TTMT’s India PV organization has demonstrated this, when all eyes had been on JLR. Retain ‘BUY/SO’ with a revised SoTP-based TP of Rs 539 (earlier Rs 397).
Key highlights
Details of deal: TPG Rise Climate along with co-investor ADQ will invest $1 bn in tranches more than a period of 18 months in the type of CCPS for an 11–15% stake (based on particular thresholds) in TTMT (S) EVCo [new passenger EV company as a subsidiary of TTMT (S)]. TTMT (S) EVCo will be asset-light and use the current TMP ecosystem for manufacturing, branding, back workplace assistance, and so on.
Capex: Till now, TTMT (S) has invested ~Rs 150 bn into the EV organization. Further, it expects >$2 bn investment more than 5 years to launch 10 EVs (across price tag points). And it will make EV infrastructure in India, if required, in association with Tata Power.
EV organization breakeven and profitability: Being an asset-light model, it will be Ebitda breakeven in FY23 as volumes scale up. Gross margins are comparable to ICE. Over next 5 years, expectation is EV penetration will be ~10% with TTMT’s industry share at ~20%.
Key catalysts for EV adoption: (i) Rising price of ICE due to regulatory requirement, increasing fuel price and decreasing rates of EV to bring TCO of EVs in parity with ICE engines. (ii) More model launches by business to bring in awareness. (iii) Expansion of network – distribution, charging. (iv) Introduction of extended-variety items. (v) Government push for EV adoption.
Outlook and valuation: EV surprise
India and JLR are on the cusp of powerful demand and item cycle tailwinds. This must facilitate balance sheet improvement–key driver of our Braveheart contact. The TPG deal delivers further comfort on TTMT India EV capabilities. This will be applicable to other old-line OEMs as well. As collateral harm will be the inquiries on standard ICEPV organization. This is currently reflected in the valuation of worldwide old-line OEMs.
We are raising SoTP-based TP to Rs 539 (from Rs 397) as we roll more than to Mar-23, incorporating Rs 105 as worth for the EV organization (assumed 20% discount to mid-point worth of transaction at $7.7 bn) and decrease the EV/Ebitda for standard PV organization to 5x from 15x earlier to recognise the cannibalisation danger. Key occasion to watch out for will be the ramp-up in EV organization. Maintain ‘BUY/SO’.