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Tata Motors: A Tesla Capex

We initiate our coverage on Tata Motors Ltd (TTMT IN) (“TM”) with a NEUTRALrecommendation on all TMIN complex on the following:

(1) The lack of TMIN’s attractiveness versus its peers;

(2) Our negative outlook on TM’s credit metrics for the next 12 months on rising capex at Jaguar Land Rover Automotive PLC (JLR), TM’s 100%-owned subsidiary, which will lead to weakening credit metrics in the near term. We note that the recent rating downgrade by Moody’s and S&P removed headline and downside risk in the near term.

(3) Rising execution risk on the company’s investment in electric cars where more and more competitors are moving in.

Moody’s and S&P downgraded TM’s senior unsecured debt ratings by one notch from Ba1 and BB+ to Ba2 and BB on 13-July and 26-July, respectively, on rising capex. We agree with Moody’s and S&P that rising capex will result in negative free cashflow and a rising debt-to-EBITDA multiple. We expect TM’s debt-to-EBITDA multiple to increase to 3.5x by FY21 as the company continues to make significant investments in its electric car business via JLR (rated Ba2/BB by Moody’s and S&P respectively).

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