Tata Motors: Investor's Envy, Speculator's Pride

Back in the early 2000s, when I was working for a top tier investment bank, there was a huge hype around the Reliance Petroleum IPO.

I was at pains to explain it to my foreign colleagues.

How on earth can a stock's IPO be oversubscribed more than 50 times when it has not generated even a single rupee in either revenues or profits?

In fact, even the work on its refinery was yet to start in full swing, thus leaving my colleagues extremely baffled.

For most of us Indians though, the IPO's stellar success hardly came as a surprise.

After all, the stock had the name Reliance in it and was banking on the group's impeccable track record in executing large scale projects.

Needless to say, the IPO was a roaring success. The stock opened at a whopping premium of around 70% on its IPO price and was later merged with the parent entity.

To be fair though, my foreign colleagues weren't out of line either. They were completely rational in expecting that the group should have waited for the entity to be operational as well as profitable before getting it IPOed.

I am wondering what these same colleagues would be thinking about the irrational exuberance that has gripped the stock market currently.

Earlier, IPOs like Reliance Petroleum were more the exception than the norm.

These days though, it's considered normal for a company to get a bumper listing on the bourses even though it's yet to turn profitable.

Consider Zomato and Burger King.

Both are loss making companies. Yet, both of them received a huge response for their IPOs.

There are more in the pipeline. Reputed names like Nykaa, Mobikwik, and Paytm are all waiting in the wings. Needless to say, all of these are loss making and yet, are a cinch for having their IPOs oversubscribed.

Now, as a rule, I stay away from all the companies of this kind, no matter how attractive the growth prospects.

I like to see a few years of consistent profits before I am willing to recommend my subscribers bet their hard earned money on such stocks.

Now, does this rule apply to a brand new division inside an existing profit making company?

You bet it does.

If this division has not made any profits so far, you'll ideally assign no valuation to it, right? You should treat it the same way you are treating those overhyped IPOs.

Atleast this is what I did when I evaluated Tata Motors along with its EV division in one of my YouTube videos last year.

Tata Motors shares was trading around Rs 130 back then.

I declared it to be an attractive bet because it was trading at a huge discount to its fair value of more than Rs 400 per share.

I arrived at this valuation by giving zero valuation to the EV division (Electric vehicles). This was because the segment was yet to make a mark on the company's overall profitability.

Turns out, my assessment of the EV division was extremely conservative. In fact, it was downright insulting.

If a recent deal announced by Tata Motors is anything to go by, the EV division is not valued at zero but at more than Rs 600 bn.

Yes, you read that right.

Last week, Tata Motors announced it's going to raise more than US$1 bn in its passenger EV business in exchange for a stake anywhere between 11% and 15% in this new venture. The investment will go into a subsidiary of Tata Motors that will be newly incorporated.

This new company shall leverage all existing investments and capabilities of Tata Motors and will channelise the future investments into electric vehicles (EV), dedicated BEV platforms, advanced automotive technologies, and catalyse investments in charging infrastructure and battery technologies, the company said.

This is a massive new development if you ask me. And one that has huge implications for the overall valuation of the company.

One way of looking at this is pretty straightforward.

I assign a valuation of Rs 600 bn to my estimate of the company's fair value and arrive at a new valuation.

This will bump up my fair value estimate to more than Rs 600 per share.

Based on this, there is still some upside left in the stock based on its current share price of Rs 510 per share.

However, for that, you will have to agree that the EV division is indeed worth what the company thinks it's i.e. more than Rs 600 bn.

To be honest, the EV revolution is still at its nascent stage. There are a lot of moving parts to consider before one arrives at the winners and the losers in this space.

Therefore, the Rs 600 bn valuation accorded to the company's EV division is certainly based on a lot of guesswork.

I, for one, am not willing to take this number at its face value.

I will perhaps seek a margin of safety of at least 50% if not more while valuing the EV business.

Of course, this is just my own personal preference. Your estimates could be based entirely on what you think is the right number. For all you know, you may think of this number as low and in fact, may like to value the EV division much higher.

All I can say is by trying to value the EV business, the company and the marquee investors may have injected a huge speculative component in the stock's overall valuation.

As it is, the company's stock price has fluctuated wildly historically based on its overall profitability.

Now the EV division and an attempt to value it by the management, have muddied the waters further in my view.

Be ready for an even more turbulent ride in the stock price of Tata Motors.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter

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