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MOSL: TATA MOTORS (Buy)-Stress Test-How low can the stock price go?

Tata Motors: Stress Test: How low can the stock price go?; Liquidation value at ~INR256/share; favorable risk-reward at CMP

(TTMT IN, Mkt Cap USD14.4b, CMP INR283, TP INR471, 66% Upside, Buy)

 

Tata Motors’ (TTMT) stock price has been under pressure, particularly since the beginning of 2018, on account of concerns about the demand environment, the adverse GBP movement, the noise on trade wars, etc. In CY18 YTD, TTMT’s share price has declined ~34%, as against a 7.8% decline in the BSE Auto Index and around 2.9% upmove in the Nifty 50. In this note, we evaluate the worst-case scenario liquidation value for TTMT and more realistic-case downside from current levels. We also highlight the potential triggers – both positive and negative – that need to be closely watched.

•  We assess liquidation value at ~INR256/share or ~10% downside from current level. This is after considering the intangible assets of JLR and India business at 35% of book value (based on 35% capitalization rate v/s JLR’s 80%). While stocks have traded below their liquidation values in the past, barring any global macro events, we do not see TTMT sustaining at such levels for a long time.
• At ~INR256/share, TTMT would be valued at ~0.9x FY18 P/B, which is close to its floor P/B valuation of 0.9x in the last 10 years.
• Interestingly, even during the Global Financial Crisis (GFC) and worst financials ever for JLR (EBIT margin of -6.5% in FY09), similar health of India financials (EBITDA margins at 6.7% in FY09) and negative CFO, the bottom valuation for TTMT was at 0.9x in 3QFY09.
• Coincidentally, JLR’s peers BMW (0.98x) and Daimler's (0.76x) bottom valuations are also around ~0.87x P/B (ex GFC).