CV recovery key to Tata Motors re-rating

Peers such as Ashok Leyland get higher valuation as they have gained market share at Tata Motors’ expense

Tata Motors has reported another tepid show, for the month of June. After having lost about 570 basis points in market share over three years, it reported a two per cent year-on-year decline in commercial vehicle (CV) sales.

Closest peer Ashok Leyland reported an 11 per cent spurt for the same period. Barring the under-2 tonne mini truck segment, it has lost significant market share in the nine sub-segments that make up the light, medium and heavy CV sector.

From dominating almost all categories, it ceded market leadership in the 7.5-12 tonne segment to Volvo Eicher Commercial Vehicles, in the 26-35 tonne tractor trailer segment to Leyland and in the up to 7.5 tonne bus segment to Force Motors. All this has reflected in the share price, which has shed 24 per cent from a 52-week high in September 2016, while the benchmark BSE Sensex has risen 10 per cent in this period.

In the near term, analysts say, the decline in market share is unlikely to be arrested. Analysts at Edelweiss Securities believe a shift in demand to higher tonnage segments is likely to help Leyland, with the latter’s strong positioning in the above 35 tonne CV segment.

The Street will be watching for any sign of a turnaround in Tata's domestic business, given the investment of ~1,500 crore it is making in CVs to regain market share. The company also made changes at the leadership of the CV business, which analysts say is a good sign and signals a strong intention.

Guenter Butschek, managing director, has said the priorities are cost reduction, regaining of market share, a faster time to market and addressing of supply constraints. Unless the company delivers on these, say analysts, it will keep losing to competition. Leyland, for one, gained share both due to a structural shift to higher tonnage vehicles and improved distribution. While Tata Motors is doing well in the passenger vehicle business, the CV segment needs to bounce back for the Street to assign a re-rating.

The domestic business is 15 per cent in a sum-of-the-parts valuation for Tata Motors’ consolidated operations. And, trades at eight times its FY19 enterprise value to operating profit.

Leyland and Maruti Suzuki (though strictly not comparable) trade at 10-13 times on this parameter.

While Jaguar Land Rover (JLR) will continue to drive the performance of consolidated operations, on the back of new product launches and platform consolidation, beside ringing down product development costs, re-rating of the domestic business would be the biggest trigger for the stock.

Credit Suisse estimates the scrip would rise to ~630. Analysts believe the best case scenario would translate into a target price of ~800. This, however, hinges on the CV business gaining market share, a better show at Tata Motors Finance and value unlocking by listing of JLR’s China joint venture.

For now, analysts advise that investors should take exposure to the stock only after the company displays a sustained rise in volumes and recoups market share.