Tata Motors’ Stock Rallies On Morgan Stanley Upgrade

Morgan Stanley upgraded Tata Motors Ltd. as it expects the next two years to be “strong” for Indian autos, and especially Tata’s Indian business because of its lean cost structure, refreshed model portfolio, and operating and financial leverage gains. That propelled the automaker’s stock by nearly 10%.

“As India’s auto cycle emerges from multi-year lows, Tata Motors will see the highest operating and financial leverage gains,” the research house said in a report as rated the company ‘overweight’ against ‘equal-weight’ earlier. “Market-share wins in India’s passenger vehicle and commercial vehicle businesses could also re-rate the name from a global luxury play to a global and India play.”

In a bull case, Tata Motors reaches zero net debt by 2024, while India passenger and commercial vehicle multiples go close to peers, driving about 84% upside, the report said. “Our base case assumes Rs 158 billion (Rs 15,800 crore) net debt by FY24.”

According to Morgan Stanley, Tata Motors’ passenger vehicle market share at 10% is the highest since the fourth quarter of FY16. From FY23 the business will be moved to a separate low-debt subsidiary, and the aggressive cost cutting and leverage gains would drive its passenger vehicle business.

The research house values the passenger and commercial vehicle business at $5-billion (Rs 37,445 crore) and about $6-billion (Rs 44,934 crore) market cap.

Besides, the risks from the semiconductor shortage in the near term and small scale in the long term for Jaguar Land Rover, Tata Motors’ luxury brand, “now look well understood”.

The maker of the Safari and Tiago saw its retail sales rise over the preceding month in September. Barring Tata Motors, all prominent passenger carmakers tracked by BloombergQuint were running low on inventory—the gap between wholesales and retail sales—at the end of September.

The company had in August told BloombergQuint that it was buying supply-chain inventories during the lockdown imposed to curb the second Covid-19 wave. That limited the impact of the chip crisis and helped the company stock dealerships.

Shares of Tata Motors gained as much as 9.40% as of 10:25 a.m. on Thursday. Of the 33 analysts tracking the company, 21 have a ‘buy’ rating and six each suggest a ‘hold’ and a ‘sell’, according to Bloomberg data. The average of the 12-month consensus price target implies an upside of 2%.

The stock has rallied 94.6% so far this year compared with a 26.2% rise in the S&P BSE Sensex. The Relative Strength Index is at 74, indicating the scrip may be ‘overbought’.