Despite all signals (freight rates, interest rates, vendor production plans, and better sales trajectory since September) pointing towards a solid recovery in Q4 in Tata Motors' core truck business, the stock has remained flat since mid-November, ever since it emerged as the front runner for Jaguar-Land Rover (JLR).
On the other hand, the share price of Ashok Leyland (ALL), its biggest competitor in the CV space, has appreciated by ~25% in the same period. There have been rumours of expected corporate actions in ALL, but logic and recent developments seem to belie them. A share buyback, one of the rumours, does not make sense given ALL's INR 40 bn capex plan and the recent fund raising through ECB (USD 250 mn) to fund it. An alliance, JV or merger with a global truck maker is also highly unlikely, given AB Volvo and Daimler AG, the two most likely partners, have recently struck deals with Eicher and Hero group respectively.
This would imply that the market is looking at the ALL stock as a direct play on the anticipated recovery in the commercial vehicle cycle, and unlike Tata Motors', unburdened with the lingering uncertainty and baggage of a big global acquisition. Our analysis suggests the market is valuing JLR as worthless. We see an anomaly here and maintain our 'BUY' recommendation on the Tata Motors stock.
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