Tata Motors Share Price: Shares of Tata Motors Ltd has been downgraded by the brokerage firm UBS from neutral to sell. However, it has raised its twelve-month target price for the company’s shares to Rs 450 from Rs 320 earlier.
Meanwhile, Tata Motors’ management remains optimistic about the demand situation for its luxury vehicles, with a pipeline of electrified models on the horizon.
UBS conducted an extensive analysis of the global premium electric vehicle (EV) industry with a focus on Jaguar Land Rover (JLR), which constitutes over two-thirds of its sales and EBITDA in fiscal year 2023. The findings reveal that the market is underestimating the risks and vulnerabilities faced by JLR due to the rapid electrification of premium cars. Additionally, Tata’s domestic market share in the automotive industry is nearing its peak due to intensifying competition.
UBS said investors are likely overlooking the significant shift in the global premium car market caused by electrification. It noted that electrification in China is disrupting the profit pool of global premium brands, and expects the same to play out in other regions.
“We foresee this eroding JLR’s margins to about 4 per cent in FY25/FY26 versus guidance for double-digit EBIT margins in the medium term. Also, the strategy to put Jaguar centre stage with three new EV models warrants some caution, in our view, given the lacklustre attempts to revive Jaguar in the past,” it said.
PV market share
Tata has successfully revitalized its presence in the passenger vehicle (PV) segment in India through its new model cycle and innovative approach of converting ICE vehicles to EVs. However, UBS predicts that Tata’s market share in the PV segment will peak due to a relatively weaker launch pipeline compared to market leader Maruti, coupled with increasing competition in the EV market. UBS also notes that Tata’s competitors have strong EV launch pipelines, prompting a reassessment of Tata’s EV valuation. In the commercial vehicle (CV) segment, Tata continues to struggle with lower volumes and margins, raising concerns about a potential CV market slowdown.
EV Shift
UBS said investors are likely overlooking the significant shift in the global premium car market caused by electrification. It noted that electrification in China is disrupting the profit pool of global premium brands, and expects the same to play out in other regions.
“We foresee this eroding JLR’s margins to about 4 per cent in FY25/FY26 versus guidance for double-digit EBIT margins in the medium term. Also, the strategy to put Jaguar centre stage with three new EV models warrants some caution, in our view, given the lacklustre attempts to revive Jaguar in the past,” it said.
Valuations
Besides, UBS felt that the roughly 23 per cent outperformance by Tata Motors shares over the S&P BSE Auto index this year following JLR’s robust earnings, driven by an unsustainable mix and near-zero discounts, is short-lived, and presents a good selling opportunity for investors.
“At the current price, JLR’s implied PE is at a 70 per cent premium to BMW AG/Mercedes, in our view, despite JLR lagging in financial/technology parameters. JLR’s moderating ASP/ margins from H2 FY24E and India’s market share and margin underperformance are key catalysts, while JLR’s margin expansion is a key risk to our call,” it said.
UBS values JLR at 7 times FY25E PE, in line with BMW’s and MBG’s current average multiples. It assigned 11 times and 6 times EV/EBITDA for India’s CV and ICE PV businesses, which is at 15-30 per cent discounts versus its target multiples for peers, owing to Tata’s market share losses. The brokerage values Tata Motors’ EV business at a 40 per cent discount to the stake sale price, considering the sharp valuation correction for pure-play EV companies since Tata’s sale of its stake.
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