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Can the World’s Least Profitable Carmaker Turnaround?


  • Restructuring is challenged by immense cost pressures
  • Pure play approach to ride EV momentum
  • Easing of supply constraints fosters revenue rebound

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Tata Motors’ revenue breakdown 2021

Restructuring is challenged by immense cost pressures

  • Tata has been loss-making for the past 3 years mainly due inefficiencies of its subsidiary Jaguar Land Rover
  • The 5-year average operating margin is with 2.3% far behind competitors
  • Under its “Reimagine” strategy, Tata puts a high focus on reducing costs
    • It has cut back its CAPEX program and aims to reduce its labor force

CAPEX cut should help to improve profitability

  • Tata continues to cut its CAPEX program in its attempt to enhance efficiency
  • This means that Tata quits its strategy of “Growth at any price”
    • The focus is now on reasonable investments with high-margin
    • But this also means that it’s leaving its high growth stage

Pure play approach to ride EV momentum

  • Tata will set up a new subsidiary in 2020, in its attempt to move forward EV
    • This entity is separate from other passenger vehicles
  • It raises $1bn new capital through the private equity fund TPG Rise Climate for a 11% stake
    • This means that Tata’s EV business is roughly valued at $9.1bn
    • Tata’s share price on the announcement date jumped by more than 20%

Demand rebound makes up for lost production

  • The new capital will be used for the battery development, charging infrastructure and manufacturing
  • By 2026, Tata plans to roll out 10 electric vehicles models
    • This should help to bring EV contribution to 20% of total sales by the end of 2026
    • Also, Tata is likely to maintain its current dominant market share of 70% in India

Easing of supply constraints fosters revenue rebound

  • Semiconductor shortages have led to a limited production of 64k vehicles of its subsidiary Jaguar Land Rover in 2Q22
    • This is down 18% YoY
  • However, at the same time, it recognized a record order of 125k, which ensures strong revenue in the near term
    • Riding the demand wave could bring double-digit revenue growth for the next 2 years

FVMR Scorecard – Tata Motors

  • A stock’s attractiveness relative to stocks in that country or region
  • Attractiveness is based on four elements
    • Fundamentals, Valuation, Momentum, and Risk (FVMR)
  • Scale from 1 (Best) to 10 (Worst)

Consensus remains optimistic regarding carmaker recovery

  • Analyst consensus does not see much further upside
    • The stock price has shown strong momentum recently
  • They are optimistic that Tata can converge its profitability to its peers over time

Get financial statements and assumptions in the full report

P&L – Tata Motors

  • Tata is likely to recognize in 2022 for the 4th year in a row
  • However, we expect that the company can turnaround its profitability in 2023
    • Strong car sales and enhanced cost-cutting program should lead to a higher margin

Balance sheet – Tata Motors

  • The company has a strong cash position, holding around 19% of its assets in cash as of 2021
  • Net fixed assets grow gradually as Tata committed to a slowing CAPEX program
  • Tata has a relatively high leverage
    • Liabilities-to-assets ratio stood at 82% in 2021
  • Retained earnings continue to decline in 2022 as Tata is likely to record a net loss again; we expect a turnaround in 2023

Cash flow – Tata Motors

  • Given its losses over the past years, it did not pay out any dividends since 2016
  • We assume that there will be no dividends at least for the next 3 years

Ratios – Tata Motors

  • Revenue was hit during the pandemic, but order backlog is sufficient to generate double-digit revenue growth at least for the next 2 years
  • Net margin could finally turn positive in 2023
  • Tata has been among the worst profitable car companies in the past years
    • It will be a challenge for the company to drive its EBIT margin to the industry average of 7-9%
  • The company has relatively high leverage

Free cash flow – Tata Motors

  • Despite the net losses, FCFF remained positive throughout the pandemic
  • CAPEX is likely to stay much lower than 2017 to 2019 level

Value estimate – Tata Motors

  • Global car sales likely to see strong rebound over the next 3 years
  • Profitability is suppressed in the short run by higher raw material prices and semiconductor shortages
    • Plus, cost cutting measures implemented by Tata may take time to turn beneficial

World Class Benchmarking Scorecard – Tata Motors

  • Identifies a company’s competitive position relative to global peers
  • Combined, composite rank of profitability and growth, called “Profitable Growth”
  • Scale from 1 (Best) to 10 (Worst)

Key risk is ongoing supply chain disruptions

  • Ongoing supply chain disruptions create shortages (e.g., semiconductor chips) and increase production costs
  • Failure to implement adequate cost cutting measures
  • EV investment could not be sufficient to keep up with competitors


  • Value addition through newly formed EV subsidiary might be overhyped
  • Slowing CAPEX plan could constraint production growth
  • No dividend policy requires return generation from price

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