- Moat: Changed from Narrow to None.
- Fair Value Estimate, FVE: Rs 349
- The shares of Tata Motors currently trade at a steep 70% discount to our Rs 349/$23 FVE.
- In the U.S., Tata Motors trades as an American Depositary Receipt; 1 ADR = 5 common shares of the Indian stock
- Tata Motors is positioned to gain from the continued growth in Indian automotive sales and the expansion of luxury markets in emerging economies, especially China. The imperative remains for Tata Motors to keep investing in new models across brands and vehicle platforms. The brand also needs to improve on its ability to execute vehicles at world-class quality levels. While improving, some JLR products still suffer from perceived poor quality.
India's largest commercial truck maker and owner of Jaguar and Land Rover, or JLR, reported a loss per share of Rs 23.46 for fiscal first-quarter 2021 ended June 30.
Despite a 72% plunge in global vehicle volume, revenue declined 48% to Rs 31,983 crores, coming in better than we expected, especially given India vehicle unit sales were zero in April.
As reported, EBIT was at negative Rs 4,813 crores, not terrible considering the shellacking that unit volume took from COVID-19. Even though the coronavirus crisis keeps market volatility high, we think the 5-star-rated shares of Tata Motors represent compelling value for long-term investors. The shares are currently trading at a steep discount to the FVE.
JLR had been in turnaround mode prior to the COVID-19 crisis. Even though the pandemic pummeled the quarter, JLR achieved GBP 1.2 billion in cost savings. As a result, the company increased its targeted cost savings under its "Charge+" program by GBP 1.0 billion. The original GBP 1.5 billion cost savings target is now GBP 2.5 billion, to be achieved by the end of fiscal 2021. With the increased cost savings, JLR first quarter cash burn was GBP 1.5 billion, GBP 500 billion less than GBP 2.0 billion guidance. Most of the cash burn was attributable to a GBP 1.1 billion working capital unwind.
We think liquidity at both TML and JLR is sufficient to get through the coronavirus crisis, barring a second wave that closes dealerships and factories. Fiscal first-quarter TML liquidity consisted of Rs 5,399 crores cash with Rs 1,500 crores available on its undrawn revolving credit line, for a total of Rs 6,899 crores. JLR’s liquidity as of June 30 included GBP 2.748 billion in cash and GBP 1.935 billion of undrawn credit facility for total liquidity of GBP 4.683 billion.
Earlier this year, we changed our rating from narrow to no-moat on the increased risk of credit default from a leveraged balance sheet during a period of coronavirus-induced industrywide automotive factory closures.
The unknown duration and severity of the pandemic makes it challenging at best to forecast any return to automotive industry normalcy. The increased risk represents potential major shareholder value destruction, which can derail a moat that might otherwise appear warranted.
We believe it is more likely than not that Jaguar Land Rover successfully completes its turnaround and Tata Motor's weathers the storm resulting from the coronavirus pandemic. However, we recognize the heightened risk of a credit default under the current onerous operating environment in our no-moat rating.
Absent increased risk of credit default, Tata Motors' moat would be narrow and driven by the strength and global recognition of its Jaguar and Land Rover brands.
