India's Tata Motors (TTM) got a big stock market boost on Tuesday, Oct. 12, after an Abu Dhabi-backed investment firm announced its plans to pump $1 billion into the automaker's coffers. The investment is specifically earmarked for Tata's electric vehicle (EV) ambitions. This will increase the value of Tata's EV subsidiary to almost $10 billion. With just 900 EVs rolling off Tata's assembly lines monthly, is the stock market's elation warranted? Here's a closer look at why there might be a cautious bull case for the Mumbai-based car conglomerate.
What the market's responding to
The rocketing stock prices were triggered by a planned $1 billion investment from TPG Rise Climate, a recently founded investment firm "constructing a portfolio of companies that can enable carbon aversion in a quantifiable way." The firm invests in clean energy, decarbonized transport, "green industrials," and other eco-friendly companies and initiatives.
According to the press release, the approximate billion-dollar investment will give TPG an 11% to 15% stake in Tata Motors. The money will be used to found a subsidiary of Tata dedicated to electric vehicle manufacturing, with a $9.1 billion valuation including the planned investment. The "first round of capital infusion will be completed by March 22" of 2022 and the full billion will be available to the subsidiary before the end of next year.
Image source: Getty Images.
Tata Motors plans to have its subsidiary release 10 EVs over the next five years. The company wants to "play a leading role in the Government's vision to have 30% electric vehicles penetration rate by 2030" in India, a potentially enormous market, according to chairman N. Chandrasekaran. The launch of the subsidiary and the major investment in it by TPG Rise Climate will also hopefully "catalyze" development of a stronger electric vehicle recharging network in the country, according to Tata.
Criticism of the subsidiary's $9.1 billion valuation could be based on Tata's relatively low electric vehicle production numbers. Presently, it is manufacturing around 900 EVs per month. This metric looks trivial compared to the numbers of internal combustion engine (ICE) vehicles made by competitors. Indeed, it recalls Tesla's (TSLA -4.23%) soaring valuation relative to its comparatively low production of less than a million vehicles per year. Like Tesla, though, Tata may have an ace up its sleeve rendering current production less important than future opportunity.
Ford news and Tata Motors' future
Though Tata's EV production figures are still low, the main factor is how quickly it can ramp up manufacturing as the electric car market expands. Its future ability to win market share and multiply its output is more crucial to its eventual valuation than current manufacturing figures. As I previously argued, Tesla's lofty valuation compared to traditional automakers is based on its manufacturing growth potential and positioning to seize large EV market share once consumer purchases pivot decisively from ICE to EV sales.
From this perspective, Tata Motors' low EV production right now isn't a problem provided it can boost future manufacturing as market opportunities open up. In fact, it may be currently in the process of acquiring the means for just such a rapid expansion.
According to a Sept. 9 press release, Ford Motor Company (F -1.61%) announced the shutdown of vehicle manufacturing at its India factories over the next nine months. Indian domestic production of Ford vehicles has already stopped, and export production is winding down to a planned second-quarter 2022 final halt. Ford will continue operating in India by importing its vehicles from abroad to sell there.
The Economic Times of India reported an unconfirmed rumor that Tata Motors is forging a deal with Ford to buy the American carmaker's facilities. The Maraimalai Nagar factory, allegedly the acquisition negotiations' main focus, can make 340,000 engines and 200,000 complete vehicles annually.
Tata's representatives haven't visited any of the Ford factories, including the Maraimalat Nagar facility. However, it is in talks with M.K. Stalin, the chief minister of the Tamil Nadu government, which would need to approve the takeover before it occurred. The government has attempted to reassure workers at the Ford plants another automotive company will take over operations, without naming any specific enterprise.
A Tata Motors acquisition of Ford's massive advanced facilities, if realized, would greatly expand its production capacity. This could help position it to ramp up EV manufacturing numbers sharply as the market expands, winning market share for itself. The stock market's bullishness over this company appears somewhat justified in light of these developments.
If Tata buys Ford's factories and uses them to expand EV manufacturing, a bullish scenario looks likely in the medium to longer term. Uncertainly about whether this is what Tata is planning merits some continued caution, but it could well end up being a valuable company among today's expanding lineup of electric car stocks.
