Tata Motors’ (NYSE: TTM) share price has surged 20% in the past week after the Indian automaker announced it has raised capital for a new venture focused on electric vehicles (EVs).
Private equity firm TPG’s Rise Climate Fund and Abu Dhabi’s state holding company ADQ will invest a combined $1bn in the new EV entity, which will be a subsidiary of Tata Motors. They will hold between 11% and 15% of the new company, which values it at up to $9.1bn.
Growth opportunity for Tata Motors
The subsidiary will focus on developing EVs in addition to new battery technology and charging infrastructure. It aims to launch 10 new EVs over the next five years to capitalise on strong forecast growth in India and across the global economy.
Indeed, EV demand has surged over recent years. In 2020, India bucked wider automotive trends to deliver a 41% rise in registrations versus a 16% decline in the global car industry. In India, EV sales are expected to rise from 1.4m in 2020 to 10.9m per year by 2030. Their growth is likely to be expedited by a government target that 30% of all vehicles sales by the end of the current decade are EVs.
Meanwhile, there are expected to be 145m EVs on the world’s roads by 2030. This compares to just 10m at the end of 2020. As such, the growth opportunities for automakers, such as Tata Motors’ new EV subsidiary, seem to be strong – especially with the world economy forecast to grow by 5.9% in 2021 and by a further 4.9% in 2022.
Rising uncertainty?
Of course, the EV marketplace is becoming increasingly saturated. Of the world’s 20 largest vehicle manufacturers, 18 have stated their intention to rapidly scale their EV production through the release of a wider range of models. With technology likely to rapidly improve over the next decade, retaining a competitive advantage over peers could become a costly process that produces a relatively disappointing return on investment.
Competition in Tata Motors’ domestic market is likely to increase rapidly in the short run. Tesla is apparently preparing to launch its vehicles in India, while rumours suggest that reduced import duties for EVs could be on the horizon. As such, there is a risk that Tata Motors’ new subsidiary lags rivals and is forced to play catch-up over the coming years.
Furthermore, short-term threats including the potential for additional Covid-19 containment measures and the ongoing global semiconductor chip shortage could weigh on the wider automotive sector.
Investment outlook for Tata Motors
Following their recent surge, Tata Motors’ shares trade on a forward price-earnings ratio of around 16 using next financial year’s forecast. While this is significantly higher than the ratings of other automotive companies, the firm is expected to deliver a 21% rise in earnings per share in the 2024 financial year.
As such, it could offer long-term growth potential should catalysts such as a global economic recovery and increasing take-up of EVs materialise. However, there remain real risks to the firm’s growth prospects, both in the short run and long term, that may equate to significant volatility in its share price.
