Reducing non-core debt to pare debt: Tata Motors

Update on the Indian Equity Market:

After a week-long rally, investors booked profits which led to a fall of 52 points in Nifty to close at 12,087. This follows the weak Asian markets following the rising death toll from a virus spreading from China. Apart from result season, there was no major catalyst to move the markets on Friday. Within the sectoral indices, Media (1.7%), Pharma (0.6%) and IT (0.5%) closed the day higher while REALTY (-1.8%), AUTO (-1.0%) and PVT BANKS (-0.5%) were the highest losers. Among the index stocks, ZEEL (5.5%), NTPC (3.2%) and COALINDIA (2.8%) led the gainers whereas EICHERMOT (-3.1%), TATAMOTORS (-3.0%) and INDUSINDBK (-2.7%) brought the index lower.

Reducing non-core debt to pare debt: Tata Motors

Excerpts from an interview with Mr Guenter Butschek, MD & CEO – Tata Motors published in Livemint on 7^th February 2020.

• Mr Butschek said that the company has invested sufficiently in its product library that includes common vehicle architectures, powertrains, transmissions, and other shared technologies to reduce overall product development cost.
• He is confident that in the coming two years, the company will see strong growth as far as modularity is concerned across commercial and passenger vehicles. He said that the company has done homework on its turnaround plans, investing in new technology platforms such as CESS (connected, electric, shared and safe mobility) and tapping into the Tata Group companies’ strengths to build an electric vehicle (EV) ecosystem.
• Referring to the company’s efforts to strengthen its financials, he said Tata Motors has turned cash accretive despite the collapse of the medium and heavy commercial vehicle (MHCV) segment, which contributes 47% of total commercial vehicle revenue that accounts for 65% of total domestic revenue.
• The product portfolio of company is much better than what it was when the economic slowdown began two years ago. He is confident that once the economy revives, the significantly upgraded products would do much better in terms of cost-based contribution to company’s margin base.
• Butschek said that customers would take a while to absorb the higher cost of purchases under BS-VI emission norms, which would entail a product price increase of 10-15%.
• The company had ₹ 233,365 mn worth of debt in its India business as of 30^th September 2019. The consolidated debt including Jaguar Land Rover (JLR) stood at ₹954,650 mn. He said that the company is planning to reduce non-core assets to reduce the debt.
• The company is focusing on reducing costs, including material costs and working to enhance productivity.
• As part of its turnaround plan, Tata Motors plans to launch 12-14 passenger vehicles over the next three to five years, besides at least four new electric vehicles over the next 18-24 months.

Consensus Estimate: (Source: market screener website)

• The closing price of Tata Motors was ₹5/- as of 07-February-2020. It traded at 109x/ 11x/ 7x the consensus earnings estimate of ₹1.6/ 15.4/ 24.7 for FY20E/ FY21E/ FY22E respectively.
• Consensus target price of ₹ 201 /- implies a PE multiple of 8x on FY22E EPS of ₹ 24.7 /-