Tata Motors - JLR pivots itself towards an electric future! - ICICI Securities

Tata Motors' (TTMT) key subsidiary Jaguar Land Rover (JLR) has unveiled its new management strategy (Reimagine), which centres around electrification. The pillars of the strategy are: a) Jaguar to be converted into a pure play electric vehicle brand by CY2; b) introduction of six new pure electric models for Land Rover by CY25/26; c) capex spends limited to ~GBP2.5bn would include investments for EVs and ADAS technologies; d) collaborate with Tata group, on clean energy, ADAS and software development; e) financial targets of >10% EBIT margins and net debt negative by 2025. We appreciate the management taking the hard call to voluntarily moving away from ICE technology in near future. We believe this would lead to significant improvement in investor confidence in JLR's ability to create a right to win in the future (EVs). This is likely to aid valuation rerating. We upgrade our multiple for JLR to 3.0x (earlier: 2.5x). Maintain BUY.

Key highlights of the strategy:

- Jaguar to pivot into all-electric brand by 2025, management also expects ~60% of Land Rover sales to come from electric segment by 2030. This we believe is a positive capital allocation move as incremental capital deployment is shifting towards higher value-accretive technologies (EVs, hydrogen) from a terminal standpoint.

- Annual capex of ~GBP2.5bn will include investments in electrification technologies and other ADAS services (e.g. connected vehicles), which will improve customer experience. The discipline and prioritization of capital is a welcome change; we believe as Jaguar turns pure electric its capital efficiency would also improve with enhanced focus on battery technology, raw materials (e.g. cathode).

- Reimagine is designed to deliver cost reduction (via platform, vendor consolidation), quality improvement (e.g. setting new benchmarks). The strategy will also see JLR right-sizing itself further, reskill its people to create a more agile and flat organization. JLR would also reduce its non-manufacturing infrastructure in the UK to benefit from potentially lower costs and more diverse talent pools.

- Emphasis on collaboration and knowledge sharing with Tata group, on clean energy, connected services, data and software development. Tata group has other strong organizations in its portfolio which can aid JLR/TTMT in their electrification mission.

- Management indicated top priority to product quality over volumes. This change in approach leads to financial targets of: a) EBIT margin >10%, and b) positive net-debt by 2025. We are assuming EBIT margins of ~5.3% in FY23E, which leaves meaningful room for surprise on our estimates.

Valuation and risk

We believe the decision to shake off the inertia and transition into a pure play electric vehicle luxury car brand could be one of the best decisions the new management team at JLR might take. This provides a clear direction for future capital deployment towards clean technologies (EVs, hydrogen) and ADAS though without losing the focus on profitability and quality. The deleveraging plan ('net debt negative') by 2025 is ambitious (yet possible), and depends on the JLR's ability to deliver on its EBIT guidance (>10%).

We upgrade our target JLR multiple to 3.0x (earlier:2.5x) EV/EBITDA as its starts to benefit from evolving into a pure play EV company. We also upgrade target valuation for India businesses on the back of improving relative performance on both CV and PV business. We value the CV business at 14x EV/EBITDA (in line with CV industry peers) and PV business at 6x EV/EBITDA (earlier:4x). We reiterate our BUY rating on the stock with a revised SoTP-based target price of Rs389 (earlier: Rs325).

Downside risk: Management deviation from the path of capital allocation discipline in JLR.

Upside risk: Domestic CV cycle improves much faster than anticipated.

Shares of TATA MOTORS LTD. was last trading in BSE at Rs.333.3 as compared to the previous close of Rs. 325.25. The total number of shares traded during the day was 3847809 in over 26324 trades.

The stock hit an intraday high of Rs. 335.6 and intraday low of 324.05. The net turnover during the day was Rs. 1267650746.

Source : Equity Bulls

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