Tata Motors shares get 'Sell' call; UBS says negatives overlooked, cites 3 risks for stock

Foreign brokerage UBS has resumed its coverage on Tata Motors shares with an anti-consensus view. The brokerage has suggested 'Sell' on the stock with a target of Rs 320, saying the JLR-owner's negatives are overlooked and that positives are largely priced in. UBS said the market is underestimating the rapid electrification of premium cars and JLR that accounted for two-third of Tata Motors' sales and Ebitda in FY23 could be vulnerable going ahead.

EV wave

UBS said investors are likely overlooking the significant shift in the global premium car market caused by electrification. It noted that electrification in China is disrupting the profit pool of global premium brands, and expects the same to play out in other regions.

"We foresee this eroding JLR's margins to about 4 per cent in FY25/FY26 versus guidance for double-digit EBIT margins in the medium term. Also, the strategy to put Jaguar centre stage with three new EV models warrants some caution, in our view, given the lacklustre attempts to revive Jaguar in the past," it said.

PV market share

On the other hand, UBS raised questions over whether the Indian PV market share is peaking. The foreign brokerage said Tata successfully turned around the India PV segment owing to the new model cycle and its differentiated approach of converting ICE to EV.

"However, we expect its PV market share to peak as its launch pipeline is much weaker than market leader Maruti's and EV competition is intensifying. Its other competitors also have strong EV launch pipelines, prompting us to revisit Tata's EV valuation. In CVs, Tata continues to underperform on volumes and margins, with mounting worries of a CV slowdown," it said.

Valuations

Besides, UBS felt that the roughly 23 per cent outperformance by Tata Motors shares over the S&P BSE Auto index this year following JLR's robust earnings, driven by an unsustainable mix and near-zero discounts, is short-lived, and presents a good selling opportunity for investors.

"At the current price, JLR's implied PE is at a 70 per cent premium to BMW AG/Mercedes, in our view, despite JLR lagging in financial/technology parameters. JLR's moderating ASP/ margins from H2 FY24E and India's market share and margin underperformance are key catalysts, while JLR's margin expansion is a key risk to our call," it said.

UBS values JLR at 7 times FY25E PE, in line with BMW's and MBG's current average multiples. It assigned 11 times and 6 times EV/EBITDA for India's CV and ICE PV businesses, which is at 15-30 per cent discounts versus its target multiples for peers, owing to Tata's market share losses. The brokerage values Tata Motors' EV business at a 40 per cent discount to the stake sale price, considering the sharp valuation correction for pure-play EV companies since Tata's sale of its stake.

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