Tata Motors - Iveco : Decent acquisition but at a tough time

We believe that TML’s acquisition is in the right direction in terms of levelling up on growth. However, while the timing has allowed them to acquire the company at reasonable valuations (2x EV/EBITDA vs global peers that are trading much higher), it is also at a time when all the three auto verticals of the business are under some sort of distress. Adding to this, the European CV market is going through a down cycle without any near-term visibility of return of business normalcy. While the company is familiar with the CV business, the European CV market may have its own vagaries, for which the company may have to go through a learning curve. We value the company on a SOTP basis for a target price of Rs 694; we maintain a REDUCE rating.

Key details of the acquisition:

• A cash consideration of €14.1 per tendered share for Iveco Group N.V. (Iveco), excluding the defense business. Equates to a total value of €3.8bn.
• While Iveco shareholders will get an estimated extraordinary dividend of €5.5 to €6.0 for the defense business, if we add to it the tender offer of €14.1, we get a total exit value of €19.6 to €20.1 to existing Iveco shareholders, which is still a premium to the current market price of ~ €19.
• Iveco’s largest shareholder, Exor N.V., has irrevocably committed to support the offer and tender its shareholding, representing ~ 27.06% of Iveco’s common shares and 43.11% of all voting rights.
• The transaction is expected to close by Apr’26, subject to regulatory clearances, while the defense business sales are expected latest by Mar’26 end.
• There is a robust set of non-financial covenants for two years.

Key highlights from the Tata Motors concall:

• Combined CV entity to be EPS-accretive in two years and the acquisition-related debt may be repaid in four years, for which it could consider monetizing non-core assets and raising equity.
• Management expects 30-40% of the acquisition funding to done via equity.
• It expects initial set of synergies from revenue, capex, operational expenses to free up at least 0.5% of consolidated CV entity revenue.
• It expects ROCE for the combined CV entity to be 20% over a period of time.
• TML to get access to futuristic technologies for powertrains, ADAS, SDV. Iveco to gain from TML’s ‘design to value’ frugal engineering capability.

Full report : https://www.hdfcsec.com/hsl.docs/Tata%20Motors%20-%20Update%20-%20Aug25%20-%20HSIE-202508010733554481771.pdf?t=18202573650661

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