Buy This EV Stock With Upside Potential Of 17%, Says Motilal Oswal

Chip shortage a near-term issue; long-term view remains intact

Tata Motors (TTMT) is a significant worldwide car company that produces a wide range of vehicles including PVs, SUVs, buses, trucks, pickup trucks, and defence vehicles.

JLR’s profitability to improve, driven by market recovery and ramp-up in newly launched Defender

According to Motilal Oswal, beginning in 2HCY19, JLR volumes began to show early indications of recovery, fueled by the new Evoque, a ramp-up in I-Pace, and a course correction in China – which was initially derailed by the COVID impact and is now stalled owing to the semi-conductor shortage.

“We expect JLR (including JV) to post a 13% volume CAGR over FY21-23E (after 13.3% CAGR decline over FY18-21). This, coupled with the possibility of mix improvement and reduced variable marketing spend, would lead to a ~15% revenue CAGR,” the brokerage has said.

India business on recovery path; PV nearing cash breakeven

Motilal Oswal believes that COVID 2.0 had a significant impact on the turnaround of the Indian business. Nonetheless, the India CV market is on solid ground, with M&HCV (42 percent CAGR over FY21-23E) and LCV (21 percent CAGR) poised for robust cyclical recovery. 2HFY22 is expected to be better than 1HFY22, with momentum continuing for the following 2-3 years.

TTMT’s revised product portfolio would allow for a sustained recovery in the PV sector (34 percent CAGR) as well as market share increases, putting the company on track to achieve FCF breakeven by FY23E. In the medium term, it aims for a 15% market share in India PV, with EBITDA margins in the high single digits.

Valuation and view

“Recovery is underway in all the three businesses of TTMT. While the India CV business would see cyclical recovery, the India PV business would witness structural recovery. JLR is witnessing cyclical recovery, supported by a favorable product mix. However, supply-side issues would defer the recovery process. While there would be no near-term catalysts from the JLR business, the India business would post continued recovery. The stock trades at 9.6x FY23E consolidated EPS and 3.2x EV/EBITDA. We maintain our Buy rating, with a Target Price of Rs 400 per share,” the brokerage said in the report.

Head start in EV

India PV has two scalable and electrified platforms: Alpha Arc (Altroz and Punch) and Omega Arc (larger vehicles such as Harrier and Safari). PV has a 70 percent market dominance in EVs in India, giving it a head start in the EV industry – the competition isn’t as well-equipped. It expects to launch 1-2 electric vehicles every year by converting existing ICEs to electric vehicles, with a total of 10 pure electric vehicles on the road by 2025. By 2025, it wants EVs to account for 25% of PV volume.

Disclaimer

The above stock is picked from the brokerage report of Motilal Oswal Institutional Equities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article. The above report is for informational purposes only.