Three factors that will drive Tata Motors after nearly 180% rally in 2021 – ET Auto

Tata Motors has decidedly taken a lead in the EV market given Tesla’s teething issues and Maruti Suzuki’s reluctance to go whole hog.

MUMBAI: A difficult year on the factory floor has not affected Tata Motors’ stock on Dalal Street.

Despite being battered by the second wave of Covid-19 and the global semiconductor shortage, shares of the company have risen 177 per cent so far this year, making them the best performing Nifty50 stock by a mile. The gains in the stock have come on the back of three consecutive quarters of consolidated net losses for the company, led by weakness in its subsidiary Jaguar Land Rover. However, as has been a characteristic of this bull market, investors have bought the stock on the promise it holds instead of its current performance.

Tata Motors has become a proxy bet for investors looking to dabble in the electric vehicle revolution underway globally. The success of US-based Tesla Inc and the Indian government’s push towards electrification of the automobile sector has nudged investors to search for companies that may benefit from the technological disruption.

Girish Wagh, executive director at Tata Motors, said in a post-earnings conference call: “I think the demand has recovered pretty well after the second wave of Covid. We’ve gained market share across all four segments in Q2 with the total increase over last year’s exit being 220 bps.”

Expectations from Tata Motors’ electric vehicle plans have shot through the roof on the back of nearly $1-billion investment by TPG Rise in the EV subsidiary of the auto company. Brokerage firm Morgan Stanley said TPG’s investment marked the start of the EV story in India and Tata Motors has decidedly taken the lead.

With investors pricing in the best-case scenario for the company in the coming years, 2022 will be all about execution of those expectations.

For starters, the company will have to show it is gaining from the easing of the semiconductor shortage. This will enable it to capitalise on the robust demand it is seeing for JLR as well as domestic passenger cars. With Maruti Suzuki India struggling to launch blockbuster models in the SUV space, Tata Motors has temporarily captured the segment with several successful launches.

Secondly, the company will have to continue improving its free cash flow positions in the coming quarters to deliver on its promise of becoming debt free by 2023-24. So far, Tata Motors is yet to demonstrate its ability to reduce debt despite JLR churning out free cash in the September quarter despite adverse business conditions. The company’s non-current borrowings rose 9.3 per cent on-year in the September quarter to Rs 1 lakh crore and automotive segment’s free cash flow was negative Rs 3,200 crore.

Lastly, the company will have to start delivering on its EV promise with successful product launches. Morgan Stanley said Tata Motors has seven more launches planned for the next five years and was aiming for a 20% contribution from EVs in its India passenger vehicle segment.

Tata Motors has decidedly taken a lead in the EV market given Tesla’s teething issues and Maruti Suzuki’s reluctance to go whole hog. That said, investors and analysts remain bullish that Tata Motors’ stock has much more to offer in 2022. Brokerage firm Jefferies said Tata Motors’ fair value would be around Rs 700 over 18 months. “By FY24, we see Tata Motors’ EBITDA almost doubling from FY21, EPS reaching its past peak, and net auto debt falling 77% below FY21 level,” it added.

Also Read:

Moody’s Investors Service on Wednesday said that Tata Motors’ pact with private equity firm TPG is ‘credit positive’, as it will help the automaker to scale up its electric vehicle business.

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