Tata Motors demerger: The division of Tata Motors Ltd. into two distinct listed companies, PV, which includes India PV, EV, JLR, and related investments, and CV and its related investments, may improve attention to their respective businesses. According to Emkay Global, the action appears to be a logical continuation of the separate reporting of the CV and India PV financials, which have been managed by their respective CEOs since 2021.
The domestic brokerage stated that the move demonstrates management’s belief in the two companies’ ability to run separately and generate self-sufficient cash flows.
Emkay Global stated that they don’t foresee significant fundamental changes as both businesses were operated independently. They have slightly raised their SOTP-based target to Rs 950 from Rs 925 previously. This adjustment includes a 10% premium multiple to Tata Motors CV business compared to Ashok Leyland IN, considering the potential advantages of pure-play optionality on commercial vehicles with greater scale.
But because there is little upside left after the recent surge, the brokerage downgraded Tata Motors’ rating to “REDUCE.”
With JLR as global ammunition, the PV business can now directly compete with the market leader Maruti Suzuki India and close the valuation gap, according to Ashwin Patil, Senior Research Analyst at LKP Securities.
“The competition in the PV space will be fascinating to watch and can provide an investor with a fair choice between four of them, especially with Hyundai’s listing imminent and M&M joining the fray as the fourth rival. “TTMT will directly compete with Ashok Leyland, a pure play domestic player, on the CV front,” he stated.
Better cash usage, according to Patil, ought to bolster the optimistic feelings. It’s an equal split, so we are unable to make a valuation decision. He remained upbeat about the stock.
The management of Tata Motors is confident that this demerger will increase the company’s focus and agility, enabling it to better take advantage of the opportunities presented by the various segments and companies. Additionally, this will result in improved growth prospects, a better customer experience, and increased value for shareholders.
Each and every TML shareholder will maintain the same percentage of shares in each of the two listed companies following the demerger, which will be carried out through an NCLT scheme of arrangement. In the upcoming months, the Board of Directors will consider and approve the NCLT scheme of arrangement for the demerger. This process could take 12 to 15 months, depending on the completion of all required shareholder, creditor, and regulatory approvals.
Emkay Global noted that historically, the commercial vehicle (CV) business has generated strong cash flows, whereas the passenger vehicle (PV) business has faced challenges in consistent cash flow generation. This is attributed to high spending on product development and the process of rebuilding its market positioning.
For Tata Motors, Nomura India maintained its price target of Rs 1,057. Nonetheless, this brokerage feels that over the coming years, Tata Motors’ PV business has the potential to generate greater value. Nomura stated that further re-ratings of the CV business may be forthcoming due to its increasing market share and profitability.
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