India’s Tesla Moment? TATA Motors Capital Raise to Deliver Long Term Value

Yesterday’s Market Performance(14th October)

Nifty: 18161.80 I 169.80 (0.94%)
FII Buy Net: INR 937.31 Cr
DAX: 15,249.38 I 102.51 (0.68%)

Sensex: 60737.05 I 452.74 (0.75%)
DII Sell Net: INR -431.72 Cr
FTSE: 7,141.82 I 11.59 (0.16%)

Howdy Toasters!

In today’s issue of the Morning Toast, we discuss:

TATA Motors announced that TPG Rise Climate will invest USD 1 Bn in the EV arm.
Zee is again in news for locking horns with their largest shareholder Invesco. What now?? Keep Reading
Bloomberg Consolidated HCL Tech results.
As always, an education concept to keep you chugging along.

TATA Motors raises USD 1 Bn from investors to build out Passenger Electric Mobility Business (Damnnn) 🧐

What’s up?

TATA Motors (TTMT) has announced that TPG Rise Climate (more on the fund below) will invest USD 1 Bn in a wholly-owned subsidiary that will be incorporated to undertake the Passenger Electric Mobility business (EVCo)
TPG’s investment would be for an 11-15% stake (basis revenue targets achieved by FY27), at post-money (includes the fund-raise amount in the valuation amount) USD 6.7bn – 9.1bn (huge!!)
In addition to TPG, India’s premier auto-maker has also on-boarded Abu Dhabi Developmental Holding Company (ADQ) as a co-investor in the transaction

TPG Rise Climate is constructing a portfolio of companies that can enable carbon reversion in a quantifiable way. Ie. Climate Change & sustainable living is top of their agenda

Nice!! Give me context & some more details please? (Yesss for sure bro) 🤨

TTMT’s Electric Passenger Vehicle (E-PV) volumes stood at 4,218 units, with a 71% market share in FY21; the management expects E-PV penetration to be 10% for the industry, with a 20% market share for TTMT in the next 5 years (whaaat)
The company has guided for EBITDA break-even next year while turning cash-flow positive in the next 5 years
The newly created sub will house all dedicated EV talent & design capabilities while leveraging TTMT’s existing investments in technology, brands, manufacturing capabilities & most importantly, the current PV Sales network
EVCo (sub) plans to expand the present product portfolio, from 3 brands to 10 by FY26, with the next 7 brands to be based on adaptive & born platforms (tech stack native to TTMT)
The company also plans to invest heavily towards EV manufacturing, charging Infra, drive trains, component localization, and platforms

Interesting! Contours of the transaction? And valuations? Comparable multiples et al. (You know the drill :PP) 🙄

Developing native tech stack, building out an enhanced E-PV portfolio, and investing towards creating an EV ecosystem is expected to require cumulative investments in excess of USD 2 Bn by FY26
TPG Rise Climate is expected to provide USD 0.5 Bn by March 22, with the balance to be transferred by Q3CY22, when initial revenue flow is forecasted
The company has indicated they are open & willing to raise the remainder value from existing / new investors at a later date
Comparing to East Asian & US EV companies (Tesla), on a CY 21 basis, trailing sales multiples are in the range of 7-10x (for Chinese peers) and 15x (for Tesla, which is an outlier given the CEO’s profile)
Taking into consideration peer multiples, TTMT’s growth & return profile, and promoter standing, EVCo FY27E multiple would work out to be 7x (Source: Emkay Global)

Damn!! Final word? TTMT was up 21% yesterday, clearly, the market is enthused. What’s the longer-term view? 🙄

This maybe India’s Tesla moment, especially given the concerted effort on the government’s behalf to push an EV agenda, through subsidies (think: FAME initiatives) and import tariff cuts (for raw materials)
An investment of such a magnitude is indicative of confidence in on-ground execution of plans & vote of approval on India’s EV future, especially given it’s being made in a Passenger Vehicle manufacturer
TMT has been a laggard (as a stock & as a car manufacturer) and that is reflective in the significant valuation discount to Maruti’s PV business, CV business at the lower end of Ashok Leyland’s valuation
With a concerted effort to change brand identity, build on a first-mover advantage (71% share in E-PV space), the company’s making up for lost time and capitalizing on the next form of transport?

Keep a track? 📌

Zee Entertainment Enterprises Limited (ZEEL) has been making headlines for locking horns with their largest shareholder Invesco; here’s the full story: 🧐

It all started with the promoters (Founder Subhash Chandra and CEO/his son Punit Goenka) selling their stake in ZEEL to Invesco Developing Markets Fund to pay off some debts (in 2019, holding ~18% of the company)
Everything was going well until erosion in the value of their stock (down by 55%) and overall subdued performance turned things sour
The 18% shareholder demanded a change in top management (including bidding farewell to Goenka) post issues of corporate governance, financial irregularities and gross under-performance

Ooooof, what next? 😕

Zee Management stood by its top management, although the company did refrain from re-appointing the incumbent Independent directors, while Invesco still took matters to NCLT to follow through with their demands
A twist in this saga came with Zee’s promoters orchestrated a potential merger with Sony (which would increase their stake from 4% to 20% and let Goenka be at the helm)
The market was extremely enthused with this deal, with the stock up ~40% post the announcement, with many brokerages re-aligning their stance on the business
The combined entity would be the largest entertainment network in the country but would continue to have the present management (which was unacceptable to Invesco)

Wow okay, tell us more?🤨

While the market was enthused with the merger, Invesco was far from happy – the proposed deal with Sony would increase the Promoter Stake in the company, initially through a 4% stake transfer and later via ESOPs granted to the tune of 4%
The fund-manager was adamant in its demand to appoint a different top-management, and re-align the promoter group, even post the merger with Sony
The Companies Act 2013 states that the promoters have to hold an EGM within 45 days of Invesco’s ask and a 50% majority is required for the removal of directors

Waittt for it, things took a huge U-turn 🤯

Mr. Goenka (present MD) released a reply to the BoD, claiming that Invesco had in-fact approached the Board & Top Management for a proposed merger in Feb’21, with a large Indian group (suspected to be Reliance Industries, which was later only confirmed by Invesco’s reply)
Goenka believed the deal over-valued entities of this strategic group by Rs100bn and gave them 60% control with Goenka holding around 8%. (ESOPs of 4%)
Invesco responded to this by saying that this deal was actually negotiated by the promoter group themselves! (???)
“They want to take over the company against Indian laws,” Chandra has said while Invesco thinks the merger is “plainly an attempt to distract the general public” and stall the convening of a shareholder meet, to discuss the points put forth by the fund-manager

Wow that’s a story!🤥

This merry-go-round, with the Fund manager adamant in its demands, and ZEEL painting an all together contrary picture, is bound to impact the stock in the near term, raising questions on Top Management of the proposed entity
In similar cases (formally called shareholder activism), majority shareholders have tried to ascertain control in situations wherein there is gross under-performance (of company & stock), with recent examples like Dish TV grappling with Yes Bank (another Subhash Chandra group) and Fortis Hospitals coming to mind

We covered the initial break-out in detail, with consequences. Check it out here.

What else caught our eye? 👀

Mutual Funds unlikely to enjoy the festive season

Net inflows into equity mutual funds fell 20% in September (however monthly SIPs reached record highs)
This indicates large redemptions by lump sum investors – since the market hit record highs in sept + withdrawing money for personal use for the festive season.
Debt mutual funds saw net outflows (due to seasonal factors like advanced tax payments)

RBI makes up its mind (we guess?)

The RBI has halted its bond-buying efforts since Friday by suspending the GSAP program.
This is part of their ‘gradualisation’ approach to easing back the pandemic era – easy money policies.
It has also cut its inflation forecast from 5.7% to 5.3%

Ola Electric to raise more money

Ola Electric is set to raise $200 mn at a valuation of $5 billion from top US funds.
They are looking to double their production of the Ola Scooter following a great response from the Indian public on the day of launch

What’s next up in the results calendar?
(Source: Bloomberg)

	HCL Tech
Date of Results	14th October 21
Net Sales	2,09,800 (Rs in millions) 12.6% (YoY growth) 4.6% (QoQ growth)
EBITDA	50,766 (Rs in millions) 2.3% (YoY growth) 3.4% (QoQ growth)
PAT	32,005 (Rs in millions) 1.6% (YoY growth) (0.5%) (QoQ growth)