1:2 Split Soon: Tata's Auto Stock Recommended To BUY, Target Price Rs 1,169; 22% Potential Upside Seen

Tata Motors, the automobile giant of Tata Group, ended the trading week from June 17-21 on a bearish note with a 2% drop overall on BSE, However, this brings a buy-on-dips opportunity in Tata Motors which is on the path for demerger of its business in the ratio of 1:2. Brokerage Phillip Capital has recommended BUY for a target price of Rs 1,169, hinting nearly 22% potential upside in Tata Motors.

In its latest research note, Phillip Capital said, "We attended the investor meet of Jaguar Land Rover where the company laid out its plans and aspirations, along with an action plan to achieve its targets."

Some of the key highlights that Phillip Capital pointed out were:

- Management mentioned that an 8.5% EBIT margin is the minimum to be expected in FY25 and could be seen as the lower limit guidance

- It indicated that the existing Jaguar models will be phased out and will be replaced by new Jaguar EVs

- It highlighted that its key focus would be on mix rather than volumes; to focus on improving ASP and product mix, as it moves towards improving margins

- Revenue guidance of £30bn in FY25 and more than £30bn in FY26

- EBIT margin guidance of at least 8.5% in FY25 and 10% in FY26

- Investment guidance of £3.5bn in FY25 and more than £3.5bn in FY26

- FCF guidance of £1.8bn both in FY25 and FY26

- Target to be net cash positive both in FY25 and FY26

- In 2025, it expects to launch the Range Rover Electric, the first BEV product on its EMA platform, and also the new Jaguar

- It targets to refinance £1.5bn revolving credit facility and to also access the bond
markets in due course

On the valuation, Phillip Capital said, "The highlight of JLR's investor day was the focus on margins over volumes, in a bid to move towards its long-term target of 15% EBIT margin. Despite a strong investment plan in place, as it also transitions towards EVs, it still expects to be net debt-free in FY25. Though FY25 may not see a big improvement on margins, we expect the company's efforts to materialize in FY26 with double-digit EBIT margins."

Phillip Capital said, "Additionally, management's earlier indication of reducing cyclicality in the CV segment with a long runway of infrastructure development in India, as well as focus on market share gains in the PV segment and operating leverage benefits as volumes grow, augurs well for the company."

"We value the stock at Rs 1,169 (CV business at 12.5x FY26 EV/EBITDA, domestic PV business at 13x FY26 EV/EBITDA, JLR at 3.5x FY26 EV/EBITDA + value of subs including Tata Technologies and China JV). Maintain Buy," the brokerage lastly said.

On BSE, Tata Motors share price stood at Rs 961.05 apiece, down by 1.7% on June 21 with a market cap of Rs 3,19,450.99 crore.

Last week, Tata Motors announced that the company will hike the price of its commercial vehicles effective 1st July 2024, up to 2%. The price increase is to offset the impact of rising commodity prices. It will be applicable across the entire range of commercial vehicles and will vary as per individual model and variant.

The auto player is set to split in the ratio of 1:2. The company is planning the demerger of Tata Motors into two separate listed companies housing A) the Commercial Vehicles business and its related investments in one entity and B) the Passenger Vehicles businesses including PV, EV, JLR, and its related investments in another entity.

Earlier, this month, Tata Motors turned ex-dividend on June 11. The auto company has announced a final dividend of ₹6.00 per Ordinary Share of the face value of ₹2 each (i.e.,@ 300%) (comprising of ₹3.00 normal dividend and ₹3.00 special dividend) and ₹6.20 per 'A' Ordinary Share of the face value ₹2 each (i.e.,@ 310%) (comprising of ₹3.10 normal dividend and ₹3.10 special dividend) for the financial year ended March 31, 2024. The payment of this will be done on or before June 28, 2024.