The Tata Motors stock has been on an interesting journey over the past 18 months. After being down by double digits, the company’s stock rose to over five-fold in the past few trading sessions after seeing a brief period over Rs 500. This is despite India’s homegrown car and truck maker bleeding losses in four out of the past five quarters.

Tata Motors’ stock price initially rebounded in 2020 after Rakesh Jhunjhunwala bought a 1.3% stake in the company in Q2FY21. This followed an uptick in the company’s volumes from August 2021 onwards. For three consecutive quarters, the company’s volumes were on the rise till state-level lockdowns due to the second wave of the pandemic hurt the auto sector.

The company was already on investors’ radar as they hoped to benefit from an expected commercial vehicle upcycle due to the Centre’s plan to invest heavily in infrastructure. Investment in infrastructure like roads, highways, metro, and railway projects, usually leads to an increase in demand for trucks. This is why, even though Tata Motors’ is not making much money, investors were turning bullish on the stock. It also helps that Tata Motors has over 40% share of the CV market. At current levels, Tata Motors is valued at Rs 1.6 lakh crore.

TPG investment in EV subsidiary changes the narrative

Last week, Tata Motors announced that TPG Rise will invest nearly $1.5 billion in its newly-hived-off passenger EV subsidiary. This unbundling of the Tata Motors group into PV and CV businesses happened a year ago. Tata Motors already had plans in place to hive off its passenger vehicle subsidiary, which will be completed by January 2022. In the middle of this came the TPG deal announcement.

In September 2021, Tata Motors disclosed its electric vehicle wholesales. Although these numbers are quite small, the company has now reached a monthly wholesales run rate of 1,000 EV units. The company said that its order book for EVs is at 3,000-4,000 units.

In the conference call with analysts after the announcement of the TPG deal, Tata Motors explained that the money will come in tranches into the passenger EV subsidiary based on the subsidiary meeting certain milestones. The company will get 50% of the money by March 2022 once the EV subsidiary is set up, and the balance will come by the end of 2022.

The money will come through compulsorily convertible preference shares, which will (at the latest) convert into equity shares of the EV subsidiary by 2027. The money will be used by Tata Motors’ EV arm to ramp up product launches, nearly 10 over the next four years. 

Initially, the company will convert the internal combustion engine (or ICE), based models, from the Tata Motors PV stable. Then the company will launch long-range EVs. Once the market matures, the company plans to ramp up to cars that are purely built as EVs and not an ICE clone. The company needs a little over $2 billion to ramp up its passenger EV business. The EV subsidiary’s current fundraise will serve fund needs for a few years. The management expects some of the cash generated by the EV subsidiary to also fund its expansion plans.

The EV subsidiary will sign deals with Tata Motors to use the holding company’s plants for manufacturing EVs, for shared services like HR, accounting, etc, and royalty for using the brand names and plates of models under the Tata Motors EV umbrella. The management said all these deals will be at an arm’s length basis.

The company expects the EV subsidiary to be cash positive within three years. By being asset-light, and not absorbing any plant and machinery, Tata Motors passenger EV subsidiary will only focus on product development and will ramp up production according to market demand. There are a few pure-play EV dealerships that have opened up over the past few months across India.

Tata Motors’ moved into positive free cash flows in FY21 after its business recovered from a few years of turbulence, and the focus of the company on generating free cash flows seems to have paid off. This is the same focus it wants to bring to the EV business as well.

Tata Motors aims to turn the PV business free cash flow positive by the end of FY23, but the management also expects the business to be starved of funds as it pivots it to the EV side. The company has packaged its passenger EV business to investors who have a long-term horizon and are looking to invest in sustainable companies that focus on reducing emissions and comply with changing global energy regulations. Additionally, the company also plans to pool the energy credits for the new fuel economy norms called CAFE that seeks to reduce tailpipe emissions at the corporate level.

For now, Tata Motors has sufficient funding to turn its business around. But the company has been in turnaround mode for a while now. This new turnaround seeks to take the company in a completely different direction with equal focus on expanding the passenger EV business and taking advantage of the expected uptick in CV volumes.