Rakesh Jhunjhunwala owned auto stock triples in a year

• Follow

Shares of Ace investor Rakesh Jhunjhunwala’s favourite automaker – Tata Motors – are on a tear. The scrip has rallied 3.4 times from Rs 101.55 on July 2, 2020, to Rs 344.25 on July 1, 2021. The price is driven by higher sales and electric vehicle play.

On Thursday the company announced its sales in the domestic and international market for Q1FY22, which stood at 1.14 lakh vehicles, as compared to 24,978 units during Q1 FY21. Tata Motors’ passenger vehicle division sold 24,110 units in June, strong 3‐digit growth of 111 per cent versus 11,419 units in June 2020. Overall Tata Motors’ domestic sales have risen by 78 per cent to 43,704 units. While total domestic commercial vehicle sales jumped to 22,100 units in June from 11,401 units in May, this year.

Global brokerage firm Jefferies is bullish on the stock sees 34% upside in the stock and has set a price target of Rs 455 apiece. “A confluence of improved strategy and cyclical recovery should drive a big turnaround in company’s performance. JLR’s (Jaguar Land Rover) shift in focus from volumes to profit is cash flows promising. A fresh electric vehicle roadmap is in place though execution remains a key risk. Improving India business provides a higher floor to fair value. By FY24, we see EBITDA (earnings before interest tax depreciation & amortization) rising 90% from FY21, EPS nearing its past peak and a near zero net auto debt,” said the report.

Commercial vehicles on an upturn

Indian truck industry volumes fell 56% between FY19-FY21, but the market is coming out of a downturn. Jefferies expects a 25%/45%/15% YoY growth in FY22/FY23/FY24. “Tata Motors lost 11 percentage point of market share to Ashok in FY12-18 but has since become aggressive and its share has stabilized. The truck market is concentrated, with high operating leverage. Margins should improve as the cycle recovers,” noted the report.

Electric vehicle roadmap

JLR lags peers on electrification but has embarked on a new roadmap giving it a fresh chance, possibly the last, to catch up. In 12-18 months, it will launch next-gen PHEVs (Plug-In Hybrid Electric Vehicle) of RR (Range Rover) and RR-Sport on a new platform that will later support BEVs (Battery Electric Vehicles). Other LR (Land Rover) models will move to a BEV platform starting in 2024 and LR will have 6 BEVs by 2026. Jaguar will also shift to a BEV-only platform in 2025, potentially improving a weak franchise. JLR will consolidate from 6 to 3 platforms and have BEVs on all models by 2030.

Valuations

According to Jefferies EBITDA rose 4x and EPS (earnings per share) climbed 8x in FY10-15, led by a big turnaround at JLR. JLR’s strategy subsequently capsized and Indian trucks slowed in FY20, pulling EBITDA down 50% in FY15-20 and driving net losses in FY19-20. Business is improving again. It expects FY23 EPS is 28% above consensus. Improving share of India EBITDA from 5% in FY14-20 to 15-16% in FY23-24E provides a higher floor for fair value. Valuing India at Rs200/share at 4x FY23 PB (price to book ratio) and JLR at Rs255/share at 3x FY23 EV/EBITDA (Enterprise Value to earnings before interest tax depreciation & amortization).

(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)