Tata Motors CV shares trade at 6% discount to Ashok Leyland; worth a buy?

Ambit Capital on Monday said Tata Motors Commercial Vehicles (TMCV), the country’s largest CV franchise, continued to trade at about a 6 per cent discount to Ashok Leyland despite its scale advantages, improving profitability profile and expanding global optionality. The brokerage said TMCV as a pure-play CV leader with more than 35 per cent volume share and about 42 per cent revenue share, and argued that pricing discipline, a shift toward higher-tonnage vehicles and sustained cost measures offered scope for margin upgrades. 

The brokerage said high-margin non-core revenue streams, moderating cyclicality and the strategic benefits from the IVECO acquisition positioned the stock for a potential re-rating.

Despite a 5 per cent decline in industry volumes and nearly 10 per cent market share loss between FY19 and FY25, TMCV delivered revenue and Ebitda CAGR of 6 per cent and 7 per cent, respectively. 

Ambit expects 6 per cent and 8 per cent CAGR in revenue and Ebitda between FY25 and FY28, supported by high-margin non-core revenue streams that help cushion cyclicality. With the company divesting legacy baggage through the ongoing demerger, Ambit Capital noted that TMCV is pursuing a broader global strategy, aided by cost-competitive manufacturing, greater R&D maturity and synergy benefits across revenue, costs and capex.

TMCV continued to trade at about a 6 per cent discount to Ashok Leyland owing to slower volume growth, LCV market share erosion and the earlier drag from the passenger vehicle business. However, Ambit believed that domestic CV recovery, scale leverage, global optionality and an improving profitability profile could support a valuation catch-up. 

On a sum-of-the-parts basis, Ambit valued India TMCV and IVECO at 13.5 times and 2.5 times one-year forward EV/Ebitda, respectively, with a target price of Rs 430, implying 24.5x FY27E P/E. It preferred TMCV over Ashok Leyland. 

TMCV held a 35 per cent retail market share in CVs, led by its dominant position in heavy trucks above 31 tonnes where its share exceeded 60 per cent. Medium and heavy commercial vehicles remained central, contributing 35 per cent of volumes but nearly 68 per cent of the revenue pool. Ambit viewed rising tipper demand as earnings-accretive. While earlier losses in the LCV segment weighed on overall share, recent product upgrades, improved technology and a strengthened distribution network positioned TMCV for a gradual recovery. The brokerage expected MHCV volume CAGR of 4.2 per cent between FY25 and FY28.

TMCV’s restructuring efforts delivered 7 per cent Ebitda CAGR between FY19 and FY25, with margins expanding 70 basis points despite weaker volumes. A richer GVW mix, scale benefits and disciplined pricing were expected to drive further profitability gains. Ambit also highlighted that margin-accretive non-core revenue streams reduce the business’s dependence on the CV cycle.

The firm noted that unlike peers, TMCV had yet to revisit its FY19 volume peak, leaving scope for recovery as market share and industry volumes improve. Tight working capital management, low capex intensity and the absence of legacy drags should support free cash flow generation and keep RoCE above 25 per cent. Free cash flow as a share of sales was projected at around 8.5 per cent.

Ambit viewed the IVECO acquisition as transformative, expanding TMCV’s addressable market and creating a diversified global platform. The combined entity would have a revenue base exceeding Rs 2 trillion and volumes of about 545,000 units. The brokerage said the structure would benefit from TMCV’s cost-efficient manufacturing capabilities and IVECO’s technology and product strengths. It cited the turnaround of JLR—from a cash-drain to net-cash with stronger margins driven by platform simplification and disciplined capital allocation—as a precedent for the synergy potential.

Despite weaker volume performance, TMCV delivered stronger revenue CAGR of 7.7 per cent versus Ashok Leyland’s 5.7 per cent and higher Ebitda CAGR of 8.6 per cent versus 7.5 per cent over FY18-25, while achieving similar free cash flow conversion. Ambit expected the stock to trade closer to Ashok Leyland as domestic growth improves and the IVECO transaction unlocks scale, diversification and profitability.

Its valuation framework incorporated 13.5 times EV/Ebitda for the domestic CV business, acknowledging historical market share loss, versus the five-year average of 14 times for Ashok Leyland. It assigned 2.5 times FY27E EV/Ebitda for IVECO, valued listed subsidiaries at a 20 per cent discount and recognised other investments at 1 times P/B.