Tata Motors' India business transforms from liability to key driver, says Jefferies

Tata Motors’ Indian operations, once a significant burden, are now projected to contribute half of the company’s stock price target for FY26, according to a recent report by Jefferies. The brokerage firm highlights that despite the stock trading above its historical average, the valuation is justified given the company’s strategic improvements and growth prospects.

Market Performance and Projections

As of June 12, 2024, Tata Motors' stock is priced at ₹988.70, reflecting a modest increase of 0.16%. Jefferies has set a price target of ₹1,250 for FY26, which is 28% higher than the current market price. This optimistic target is based on the company’s enhanced performance in both its India and international operations.

The breakdown of the price target includes:

India Commercial Vehicles (CVs): ₹263

India Passenger Vehicles (PVs): ₹370

Jaguar Land Rover (JLR): ₹570

Tata Technologies Stake: ₹46

Jefferies has valued Tata Motors’ Indian CV business at 10x FY26 estimated EV/EBITDA and the PV business, including electric vehicles (EVs), at 18x FY26 estimated EV/EBITDA. In comparison, JLR is valued at 3.8x FY26 estimated EV/EBITDA, reflecting its different market dynamics.

Strategic Growth in Passenger Vehicles

Tata Motors aims to expand its market share in the PV segment from 14% in FY24 to 16% by FY27, and further to 18-20% by FY30. The company plans to enhance its product offerings, including the launch of new models such as the mid-sized SUV Curvv and the electric Harrier SUV in FY25, followed by the mid-sized Sierra SUV and Avinya EVs in FY26. These efforts are expected to increase Tata Motors' addressable market from 53% of total industry volumes to 80%.

The company is also focusing on profitability by leveraging scale benefits, improving product mix, and optimizing costs and capital expenditures.

Enhancements in Commercial Vehicles

In the CV sector, Tata Motors is aiming for steady market share growth and sustained double-digit EBITDA margins. Key strategies include diversifying its product portfolio, investing in alternative fuel technologies, and increasing the proportion of non-vehicle revenues from the early-to-mid teens in FY24 to 20% in the medium term. This diversification aims to reduce business volatility and foster stability.

The company’s initiatives also involve deploying digital solutions to enhance operational efficiency and customer engagement.

Investment Rationale

Jefferies acknowledges that Tata Motors' Indian business currently contributes only 25% of the company’s EBITDA, yet it commands a significantly higher valuation multiple due to its growth potential. The stock is trading at 5.2x FY25 EV/EBITDA, which is above its historical average. However, analysts believe this premium is warranted due to Tata Motors’ strengthened PV franchise, a robust business cycle at JLR, and ongoing debt reduction efforts.

Tata Motors’ strategic shift and enhanced operational focus position it well to capitalize on growth opportunities in the automotive sector, making it a strong candidate for investment consideration.