The Power of Three E’s: Environmentally-friendly Electric Equity

Tata Motors (NSE: TATAMOTORS)

Investment recommendation: Buy

Current price (US$): 6.60

Target price (US$): 7.58

52-week price range (US$): 5.55 – 8.55

Market cap (US$ bn): 1.9

Company & Industry Overview

Riding on a growth rate of 7.9% until 2015, the Indian Economy has taken two major hits. First with the massive wave of demonetisation wherein 85% of the total currency in circulation was invalidated and then with the GST (Goods and service Tax regime) which had an introduction fraught with difficulties and led to a slowdown across all economic activities. Despite these “disguised blessings”, India is benefitting from a rare confluence of metrics that are all pointing upwards. There are remarkably cheap valuations, relatively strong growth rates for earnings and momentum that is likely to add extra oomph for the coming quarters.

The automobile industry has been a consistent performer with a CAGR OF 5.56% and is supported by various factors such as availability of skilled labour at low cost, robust R&D centres and low cost steel production. It is estimated to grow at around 10-15% to reach US$ 16.5 billion by 2021 from around US$ 7 billion in 2016.

One particular company that has anticipated and readied themselves to capture this massive value creation in the country is Tata Motors (NSE: TATAMOTORS).

Tata Motors Limited is a leader in commercial vehicles and among the top in passenger vehicles with winning products in the compact, midsize car and utility vehicle segments. Headquartered in Mumbai, it is listed on the New York Stock Exchange (since September 2004) and has emerged as an international automobile company. Being one of the Top 10 traded stocks at NSE, this company has Tata Group as its major shareholder with a 35% market share. The current share price is Rs 426.25 with a dividend yield of 0.04%. Despite the company currently facing a negative EPS of -7.30, it has seen a rise in 10.34% in the top line of its income statement.

This is the glimpse of the price trend and I argue the stock is significantly undervalued to the extent of 10-20%. With an EV/EBITDA of 79.56, the company also has a P/E ratio of 14.26 against an industry average of 16.23.

Investment Thesis and Catalysts

1) The company is soon launching its ‘Tata Nano Electric’ cars in Delhi, in collaboration with Ola Cabs which has a market value estimation of US$ 5bn. The car uses a super-polymer lithium battery and has a promised range of 160 km on full charge. This is highly likely to make an overwhelming impact given the fact that the government wants India to run entirely on electric cars by 2030. Delhi, being one of the most polluted cities in the world, shall embrace this move and send positive signals driving up Tata Motor’s stock price significantly.

2) Being the unanimous leader in the commercial vehicles, the company is now leveraging on its niche government customer base to supply these electric vehicles to government owned Energy Efficiency Services (EESL) and has already beaten two other companies to win the bid to supply (350/500 cars). This Rs 1,120 crore EESL order has turbocharged its plans, giving it a much-desired push. The company is preparing for a much bigger play in the electric vehicle space starting with an official ‘announcement’ very soon.

3) Under India’s new tax regime in 2017, the income tax rate cut from 10% to 5% for individual tax payers earning under Rs 5 lakh (US$ 7,472) per annum is likely to create a positive sentiment among first time buyers of entry-level and smaller cars. This is gradually building up and the gradual rise in top and the bottom line is highly likely to generate an upswing reaction.

4) The changes in government policy with respect to the automobile sector including 100% FDI under automatic route, delicensing, free import of components and the ‘Automotive Mission Plan’ targeting a fourfold growth in the automobile industry shall act as a significant growth driver for the stock to achieve its target price. Since Tata Motors is a huge employment generator (around 60,000 employees) it is highly likely to negotiate favorable benefits with the government.

Risks and External Influences

1) The firm is highly exposed to severe competition as rival Mahindra is also in line to launch its electric range of cars, Mahindra e2o. Also, having the first-mover advantage comes with its own setbacks, mainly the macroeconomic uncertainty that comes with the reaction to the new product launch of electric cars.

2) In order to realise its full electric mobility scenario domestically, there is risk involving aggressive price wars by competitors as very limited components are locally produced. Even car batteries, the largest and most crucial component, remains fully imported.

3) The sudden change in regulatory mechanisms like the ban on BSIII vehicles in April 2016 might lead to the inability of the plants and supply chain to cope with demand.

Bearing these risks in mind, I recommend a buy for Tata Motors due to the herd mentality owing to its Ola partnership, upcoming new product “announcement” supporting rising Jaguar values and the favorable regulatory winds.

References

http://www.moneycontrol.com/financials/tatamotors/ratiosVI/TM03#TM03

http://www.livemint.com/Companies/OS2IL65K65Ta1XlgnsCnCN/Jaguar-Land-Rover-tests-1st-driverless-vehicle-on-public-roa.html

http://www.moneycontrol.com/stock-charts/tatamotors/charts/TM03#TM03