Why Tata Motors can be India's Tesla

Oct 21, 2021

Over the past 1 week, Indian electric vehicle news has been dominated private equity giant TPG's US$1 bn investment in the EV subsidiary of Tata Motors.

No wonder Tata Motors share price has rallied 50% in 1 week.

However, the important thing to focus on is not the US$1 bn amount. For TPG, this amount is not such a big deal.

It's the valuation at which the money is being brought in. That is eye popping.

The deal values the EV subsidiary at US$9.1 bn or Rs 673 bn. The marketcap of Tata Motors is about Rs 1,600 bn.

So as per this deal, 40% current value of Tata Motors is from the futuristic EV subsidiary!

Now that is huge.

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The yet to be incorporated subsidiary, will only house the technology and future IP. The manufacturing will be done in the passenger vehicle segment.

Also, critics are questioning the valuation. Tata Motors, on average, makes about 1,000 EVs a month.

Obviously, this is a big bet on the future.

Forecasts suggest India's EV penetration in passenger vehicles will reach 30% by 2030.

And who else but Tata Motors which will be the largest beneficiary? After all, it currently sells 70% of all the EVs in India.

As an analyst, I have been asked how can a valuation of US$9.1 bn be justified?

Let me try to make a sense of this by giving you the example of Tesla.

Traditional Car Companies v/s EV Companies

EV Manufacturers Traditional Auto Manufacturers
Number of players 16 >50
Valuations US$1.14 tn US$1.42 tn
Data Source: Equitymaster

Tesla accounts for 74% of the total electric vehicles sold in the US by market value.

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The reason Tesla and other EV manufacturers like BYD are getting this crazy valuation is based on the following 2 assumptions.

  1. Traditional firms may not be able to deliver competitive electric cars in the future

    All the traditional car makers from Daimler, BMW, JLR to Volkswagen, Ford and General Motors are working on EV. But what we see today from their stable especially Audi, Daimler, and JLR are luxury EVs.

    The mass market EV segment is still dominated by Tesla in USA and Europe and home-grown companies like BYD in China.

    Nissan has launched its flagship EV 'Nissan Leaf' cheaper than Tesla. But sales are below average despite the price advantage.

    Issues such as range and charging infrastructure are major headwinds for traditional car firms.

    Apart from first mover advantage, it's the top 3-4 companies which have been aggressively setting up the charging infrastructure.

    The market knows all this. When EV penetration increases, these 3-4 players will have a dominant share.

  2. Can EV profitability per car be better than IC engines?

    The level of data integration and complex usage of software in an electric vehicle is much more than an IC engine vehicle.

    Traditional car manufacturers rely on sale of spare parts after the sale of vehicles. There is no major high value recurring revenue after the car is sold.

    Besides, a majority of the service costs, such as labor, go to the dealerships which sell the car. It is these services which help run dealerships profitably.

    However, in an EV, add on subscription based services generate annuity income.

    Tesla's full self-driving capability is a classic example. It sells the autonomous driving software for a monthly subscription.

    This is likely to lead to higher profitability per car.

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Can Tata Motors be the Tesla of India?

Well, if we replicate these 2 assumptions for Tata Motors, here is what we get...

a) 70% market share in Electric passenger vehicle and counting...

While Tesla has a 54% market share in the EV segment, Tata Motors has a 70% market share. Its EV line up is encouraging. The company plans to roll out 10 EVs in the next 4 years.

Maruti Suzuki, the largest passenger vehicle player is on a slow track when it comes to roll outs.

What Tesla has done in EVs in the US, Tata Motors could replicate in India. This is a strong reason for the high valuation of the company.

b) Synergies with Tata group companies

The salt to airplane conglomerate has synergies across the entire EV value chain. The table below highlights how Tata Motors will go about it.

In-house Answers for the EV Eco-system

Tata group company Segment catering in the EV Eco system
Tata Chemicals Chemicals used in batteries
Tata Power Charging infrastructure
Tata Elxsi Software and integration
JLR UK Subsidiary to enable know how and technology
Source: Equitymaster

My View

The obvious choice for TPG would have been Tata Motors, considering the brand, size, and synergies.

While valuations are always debatable, it's the size of the EV opportunity which is the most important. The size of opportunity which TPG could envisage would justify the valuation paid for in the deal.

Besides, Tesla enjoys super high valuations (whether right or wrong) based on the same assumptions and will play out for Tata Motors over the next 5-10 years.

In an environment with interest rates at an all-time lows and there is ample liquidity across the globe, money is likely to chase growth and valuations are likely to take a back seat.

I believe, Tata Motors is one of the few companies you can bet on in the long-term Indian EV story.

Warm regards,

Aditya Vora
Aditya Vora
Research Analyst, Hidden Treasure

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1 Responses to "Why Tata Motors can be India's Tesla"

Dilip Purwar

Oct 21, 2021

It is same hype which was created at the time of NANO (LAKHTAKIA car).It was a dream project of Mr. Ratan Tata.TELCO miserably failed.Before EV the Tata Motor share moved only on the news of Jaguar sales in foreign market.They had everything in place before arrival of other auto player in India.TELCO once upon a time leader in commercial vehicles now dominant player is Ashok Leyland.They had such a large dealer & service network all over India before arrival of today's established player in auto industries.But not much success in auto in last 2 decades.
It is too early to name the leader in EV.Should not forget "Suzlon" for solar/wind energy.Tons of money people lost in the market.Huge euphoria for suzlon share in the past bull run.
Neither conventional energy(coal for power or IC engines for automobiles are not going so soon),We heard so much about solar panel /wind energy installation in past few years then why world wide crisis of coal recently?Gasolene is the prime fuel for auto vehicles,if USA /Europe etc converting to EV then how brent crude is ruling at $85-86.The incremental demand of vehicles is much higher then the conversion into EV. Same way Tata Power share is rising because they signed for charging station.It is not technology nor technology.But most important thing is land for charging station.How Tata Power will get get huge parcel of land at reasonable price for charging station.City gas station in cities like Delhi,Mumbai,Pune,Lucknow,Kanpur etc not able to expand fast and to depend on IOC,BPCL,HPCL etc for their service station to put CNG station.I think it is too early to declare a winner in EV segment.

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