New EV Models And Operational Improvements Will Strengthen Future Market Position

Key Takeaways

• Focus on new products and alternate powertrains is driving revenue and earnings growth through diversification and innovation.
  
• Cost efficiencies and strategic corporate actions are enhancing profitability, market valuation, and revenue prospects.
  
• Currency depreciation, reduced sales in China, competitive pricing pressures, rising warranty costs, and strict regulatory requirements pose challenges to Tata Motors' profitability and margins.

Catalysts

Designs, develops, manufactures, and sells various automotive vehicles.

• Tata Motors has been actively launching new and exciting products, such as the Tata Sierra and Harrier EV in the PV segment, and the Range Rover Electric in JLR, signaling expectations of increased future revenue due to broadened product offerings. (Impact: Revenue)
  
• The company continues to focus on alternate powertrains and intelligent solutions in both CV and PV segments, which are expected to drive growth through diversification and innovation, potentially improving overall market presence and competitiveness, thus benefitting earnings. (Impact: Earnings)
  
• Operational improvements, including cost savings and increased efficiencies (e.g., reduced net automotive debt and interest costs), are anticipated to enhance net margins, supporting better overall profitability and cash flow. (Impact: Net Margins)
  
• Successful execution of corporate actions, such as the planned demerger and securing production-linked incentives, positions Tata Motors favorably to optimize its business structure and financial base, potentially leading to improved earnings stability and market valuation. (Impact: Earnings)
  
• An improved market outlook leveraging government infrastructure spending and green initiatives in EV, combined with strategic capital investments fully funded by cash profits, is likely to drive robust growth in both domestic and international markets, thereby enhancing revenue prospects. (Impact: Revenue)

Tata Motors Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tata Motors's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.2% today to 4.9% in 3 years time.
• Analysts expect earnings to reach ₹255.6 billion (and earnings per share of ₹79.16) by about May 2028, down from ₹317.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹377.1 billion in earnings, and the most bearish expecting ₹205.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.5x on those 2028 earnings, up from 7.5x today. This future PE is lower than the current PE for the US Auto industry at 28.1x.
• Analysts expect the number of shares outstanding to decline by 3.94% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 21.24%, as per the Simply Wall St company report.

Tata Motors Future Earnings Per Share Growth

Risks

• Tata Motors faces challenges due to depreciation of currencies like the rupee and the pound against the dollar, potentially impacting revenue and earnings conversion.
  
• JLR's sales in China have decreased amid economic pressure, leading to reduced overall revenue and reflecting issues in a significant market for the company.
  
• The company's performance is hindered by ongoing competitive pricing pressures, especially visible in VME (Variable Marketing Expenses), which could affect net margins if not offset by savings.
  
• Warranty costs have risen due to the nature of repairs and inflation, impacting the cost of goods sold and reducing profitability.
  
• Regulatory challenges, such as strict emission requirements in key markets like the U.S. and U.K., could lead to increased compliance costs, affecting future net margins.

Valuation

• The analysts have a consensus price target of ₹811.7 for Tata Motors based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1300.0, and the most bearish reporting a price target of just ₹600.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹5246.7 billion, earnings will come to ₹255.6 billion, and it would be trading on a PE ratio of 18.5x, assuming you use a discount rate of 21.2%.
• Given the current share price of ₹644.15, the analyst price target of ₹811.7 is 20.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.