Tata Nexon EV launched at Taj land End in Bandra. Snapshot by Prashant Nadkar, Thursday 19th December 2019, Mumbai, Maharashtra.

The Tata Motors and TPG deal is surprising and positive for TTMT as: (i) TPG attributes a value of $6.7 – $9 billion to the TTMT passenger electric vehicle business in India – only 1 thousand sales units on September 21; (ii) It addresses the cash flow needs of the electric vehicle business (> Rs 160 crore) for the next five years; and (3) the traditional PV business can focus on its goal of double-digit market share, high single-digit margins and being positive FCF.

We’ve previously argued that OEMs have gone a long way in building capabilities while valuations are stuck on the slow track, indicating a huge option value. TTMT’s PV business in India has proven this, while all eyes are on JLR. Hold ‘BUY/SO’ with SoTP based modified TP of Rs 539 (earlier Rs 397).

the main points
Deal details: TPG Rise Climate with co-investor ADQ will invest $1 billion in tranches over 18 months in CCPS for an 11-15% stake (depending on certain thresholds) in TTMT(S) EVCo [new passenger EV company as a subsidiary of TTMT (S)]. The TTMT(S) EVCo will be asset-light and use the existing TMP ecosystem for manufacturing, branding, back office support, etc.

Capital Expenditures: To date, TTMT(S) has invested around Rs 150 crore in the electric vehicle business. Furthermore, it expects to invest more than $2 billion over five years to launch 10 EVs (across price points). It will create an electric vehicle infrastructure in India, if necessary, jointly with Tata Power.

Break-even and Profitability for the Electric Vehicle Business: Being an asset-light model, the break-even point will be Ebitda in fiscal year 23 as volumes increase. Gross margins are similar to ICE. Over the next five years, electric vehicle penetration is expected to be around 10% with TTMT’s market share at around 20%.

The main catalysts for the adoption of electric vehicles: (1) the higher cost of the internal combustion engine due to regulatory requirements, the higher cost of fuel, and the lowering of electric vehicle prices to bring the total cost of electric vehicles on par with ICE drives. (2) More model releases by industry to raise awareness. (iii) Network Expansion – Distribution and Shipping. (iv) The introduction of long-range products. (5) Government pressure for the adoption of electric vehicles.

Expectations and Evaluation: Surprise EV
India and JLR are on the cusp of strong demand and product cycle tailwinds. This would facilitate balance sheet optimization – the main driver of the Braveheart advocacy. The TPG deal provides additional convenience in the capabilities of the TTMT India EV. This will also apply to other OEMs. Where collateral damage will be the questions regarding traditional ICEPV business. This is already reflected in the global OEM assessment of the old line.

We are raising the SoTP-based TP to Rs 539 (from Rs 397) as we move to March 23, consolidating Rs 105 as value for the EV business (assuming a 20% discount to the mid-point value of the transaction at $7.7 billion) and devaluing the EV/Ebitda for the conventional PV business to 5x from 15 times earlier to learn about the dangers of eating meat. The main event to watch out for will be the intensification of the electric vehicle business. Keep “Buy/Support”.

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