Tata Motors Stock has yielded returns of more than 45% in this month and touched the 52-week high levels of Rs. 523.85. Also, Many Institutional Brokers or Institutional Research Houses like Morgan Stanley have given ratings of ‘Overweight’ and hence we will be discussing the reason behind this up-gradation in ratings and about the latest development.
• Tata Motors Limited today announced its sales in the domestic & international market, for Q2 FY22, which stood at 1,71,270 vehicles, compared to 1,10,345 units during Q2 FY21.
• The total domestic sales are up by 52% YoY from 1,06,852 units in Q2FY21 to 1,62,159 units in Q2FY22.
• “Tata Motors’ Commercial Vehicle domestic sale in Q2 FY22 at 78,226 units was ~80% higher than the previous quarter and 50% higher the same quarter last year (Q2 FY21). Post the 2nd COVID wave, markets are witnessing gradual demand recovery across most segments led by M&HCVs with improving fleet utilization levels, a higher number of road construction projects awarded, and improving cement consumption.
• Tata Motors PV business posted nearly a decade high quarterly sales of 83,933 units, registering a strong growth of 53% versus Q2FY21. This growth has come on the back of demand recovery in the industry post the Covid second wave and a strong response to its ‘New Forever’ range of cars and SUVs.
• The sales performance of Tata Motors was muted due to the widespread. The second wave of Covid-19 in the country as well as the shortage of semiconductor chips.
• The usage of semi-conductor chips is expected to rise in the future with the advancing automobile ecosystem.
• Despite the company the low sales performance, the booking even of its JLR Business is on a quite higher side which is at all-time high-levels.
‘Overweight’ Rating by Morgan Stanley:
• Amid this positive momentum for Tata Motors, a big International Brokerage Firm has also given an ‘Overweight’ Rating to the stock and has raised the target by 50%.
• These ratings can be simply understood as follows:
o An equal-weight or Neutral rating indicates the stock’s performance is expected to be in line. The average return of others in the analysts’ coverage.
o The underweight means the stock is expected to perform worse than the other companies covered in its industry.
o An overweight rating means the analyst believes the stock will produce a greater total return. Then the average return expected of others covered in its industry over the next 12 to 18 months. This can be simply referred to as a Buying Call.
• Morgan Stanley believes that Tata Motors will witness the highest operating and financial leverage gains.
• Since many investors like Fund Houses follow the ratings of these brokerage firms. There is a change in ratings by these brokerage firms, the stock witnesses rally or crash accordingly.
• It is expected the free cash outflow of JLR units can go below 1 Billion Pound. This was around 1 Billion Pound in Q1FY22The management wants it to take the same below 0.7 Billion Pound.
TPG’s investment in Tata Motors:
• Also, the company has taken early mover advantage in Electric Vehicles in India.
• TPG Rise, a fund formed by private equity group TPG will invest an aggregate of Rs. 7,500 crore in ‘TML EVCo’. The period for this investment is 18 months from the investment of the 1st tranche.
• The Board of Directors of Tata Motors has approved the formation of the subsidiary ‘TML EVCo’. This subsidiary will undertake the parent company’s passenger electric mobility business.
• ‘TML EVCo’ will be issuing compulsory convertible preference shares to TPG instead of the above-mentioned investment.
• TPG Rise will get an equity stake of up to 11%-15% in ‘TML EVCo’. The amount raised by issuing this much equity stake takes the valuation of ‘TML EVCo’ to $9.1 billion (~ Rs. 69,000 crores).
Should You Invest?
The Investment from a PE Investor in the EV Unit of Tata Motors is a big thing. The Company has already taken an early mover advantage in EV. Hence, this development in Tata Motors will be an interesting thing to watch. Here, Investors with an Aggressive Risk Profile can only think to invest in the Tata Motors Stock. Conservative and Moderate Investors should avoid this counter. Hence one should do proper research and study before making any investment decision.