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Tata Motors to demerge into two separate listed firms: Analyst say step in right direction but cautious on target price

Shareholders of TML will maintain identical shareholding in both listed entities. However, necessary approvals from shareholders, creditors, and regulatory bodies are expected to take approximately 12-15 months to complete.

On March 4, 2024, Tata Motors will demerge its operations into two distinct listed entities – one dedicated to Commercial Vehicles (CV) and the other to Passenger Vehicles (PV), including Electric Vehicles (EV) and Jaguar Land Rover (JLR) businesses.Analysts are unanimous in calling it a strategic decision but remain cautious in terms of rating and price target. 

The demerger follows the earlier subsidiarization of PV and EV businesses in 2022, emphasizing Tata Motors’ commitment to empowering each segment to pursue individual growth strategies. The move aims to enhance agility and reinforce accountability, allowing each entity to operate independently.

The demerger process will be executed through a National Company Law Tribunal (NCLT) scheme of arrangement. Shareholders of TML will maintain identical shareholding in both listed entities. However, necessary approvals from shareholders, creditors, and regulatory bodies are expected to take approximately 12-15 months to complete.

“The Board of Directors of TML, has approved the proposal of demerger of Tata Motors Ltd into two separate listed companies housing A) the Commercial Vehicles business and its related investments in one entity and B) the Passenger Vehicles businesses including PV, EV, JLR and its related investments in another entity,” the company said.

Tata Motors stated that although there are limited synergies between Commercial Vehicles and Passenger Vehicles businesses, significant synergies exist across PV, EV, and JLR, especially in the realms of electric vehicles (EVs), autonomous vehicles, and vehicle software. The demerger is seen as a strategic move to better leverage and secure these synergies.

What’s the analyst and brokerage view? 

Motilal Oswal on Tata Motors

Motilal Oswal has provided insights into Tata Motors’ recent performance and downgraded the stock to Neutral from Buy, maintaining an unchanged target price of Rs 1,000 per share. Despite a robust 204% return in the last 36 months, outperforming key indices by a significant margin, the brokerage notes limited upside potential following the recent sharp run-up in the stock.

The analysis recognizes Tata Motors’ business demerger as a positive step but indicates that most of the anticipated positive triggers are already factored into their estimates. Motilal Oswal emphasizes that, considering the SoTP (Sum of the Parts) valuation basis, there is no perceived need to revisit the target price at this juncture.

Motilal Oswal factors in an 8.5% volume growth in FY25E/FY26E, following a 4.5% growth in FY24E. This is in alignment with the management and industry’s low single-digit growth guidance for FY25. The analysis also incorporates a 100 basis points (bp) margin expansion over FY24-26E, reaching 7.8%.

The forecast includes a 6% volume growth in FY25E/FY26E, post a 1% volume decline in FY24E, aligning with the management’s guidance of near-term weakness in FY25. A 100 bp margin expansion over FY24-26E is also factored in, reaching 11.5%.

The analysis projects a 7% volume growth in FY25E/FY26E, following a robust 25% volume growth in FY24E. This is in light of anticipated weakness in global PV demand in key developed markets in 2024. Additionally, a 150 bp margin expansion over FY24-26E is incorporated, reaching 17.4%.

InCred on Tata Motors 

InCred maintained a ‘Reduce’ call for Tata Motors with a target of Rs 639, acknowledging the short-term sentiment boost but suggesting that meaningful action may occur post-split. The brokerage anticipates that post-split valuations may favor the PV Business, allocating 62% of the total valuation to it, while the CV Business is expected to hold the remaining 38%.

Despite the limited details available, analysts and investors are optimistic about Tata Motors’ ability to capitalize on growth opportunities and create enhanced value for long-term shareholders through this strategic demerger.

Mehta Equities on Tata Motors 

In response to the Tata Motors Demerger, Prashanth Tapse, Senior VP (Research) at Mehta Equities, expressed optimism, stating, “We consider this demerger news as a long-awaited strategic move and a natural progression to empower each segment, fostering higher growth with increased visibility. Our outlook remains positive, foreseeing substantial growth opportunities in the PV, EV, and JLR segments, especially in the domains of EVs, autonomous vehicles, and vehicle software, where this move will concentrate efforts. We believe this demerger positions Tata Motors to better seize growth prospects, providing enhanced value for long-term shareholders.

Tapse highlighted their positive stance on Tata Motors as a long-term narrative. He noted that the commercial vehicles business, along with related investments, would be consolidated into one entity, similar to vehicle financing and Tata Technologies. However, Tapse cautioned that it is premature to comment on the specific structure of these entities and emphasized the need for more clarity as details emerge.

He concluded, “We await further details on the demerger’s execution. Presently, with limited information available, Tata Motors is slated to be demerged into two distinct listed companies: A) housing the Commercial Vehicles business and its related investments, and B) incorporating the Passenger Vehicles businesses, including PV, EV, JLR, and its associated investments.”

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