The demerger of Tata Motors Ltd into two separate listed entities: CV and its related investments and PV, including India PV, EV, JLR, and related investments, may enhance focus on respective businesses. The move comes across as a logical progression of separate reporting of the CV and India PV financials run by their respective CEOs since 2021.
The decision, Emkay Global said, signifies the management’s confidence that the two businesses can operate independently with self-sustaining cash flows.
"While we do not envisage major fundamental changes (as both businesses were run independently), we upward revise our SOTP-based target marginally to Rs 950 from Rs 925 earlier) as we factor in 10 per cent premium multiple to Tata Motors CV business (vs Ashok Leyland IN) for potential pure-play optionality on CVs with higher scale," Emkay Global said.
The brokerage, however, downgraded Tata Motors rating to 'REDUCE' as recent run-up leaves limited upside.
Kumar Rakesh, Analyst – IT & Auto at BNP Paribas said Tata Motors is streamlining organization and capital structure, which started with American Depository Shares delisting, followed by plans of Differential Voting Rights delisting and now the announcement of separate listing of the Passenger Vehicle (PV) and Commercial Vehicle (CV) businesses.
"We value PV business at Rs 583 per share and CV business at Rs 336 per share. The board will likely appoint a valuation committee in the coming months to determine the share ratios for the demerged entities. This is a strong vote of confidence by the Tata Motors Board in the turnaround of its PV and JLR business, and its sustainability. We think JLR’s turnaround to become a modern luxury brand offers upside potential to our margin and FCF expectations," Rakesh said.
Rakesh said despite the recent re-rating, Tata Motors is trading at an attractive FY25E FCF yield, highest in his coverage. He has Tata Motors as his sector top pick.
The PV business, from competition point of view, can now directly compete with the market leader Maruti Suzuki India, with the global ammunition in the form of JLR and bridge the gap on valuation front, said Ashwin Patil, Senior Research Analyst at LKP Securities.
"With Hyundai's listing on the cards and M&M as the fourth rival, the tussle in the PV space will be interesting to watch and can give an investor a fair choice to select between four of them. On the CV front, TTMT will compete straightaway with the pure play domestic player Ashok Leyland," he said.
Patil said a better cash utilisation should add to the positive sentiments. Since its an equal split, we can't take a call on valuations. He stayed positive on the stock.
The Tata Motors management believes this demerger will help the company to better capitalise on the opportunities provided by the respective segments/companies by enhancing its focus and agility. This will also lead to a superior experience for customers, better growth prospects, and enhanced value for shareholders.
The demerger will be implemented through an NCLT scheme of arrangement and all shareholders of TML shall continue to have identical shareholding in both the listed entities. The NCLT scheme of arrangement for the demerger shall be placed before the Board of Directors for approval in the coming months and will be subject to all necessary shareholder, creditor, and regulatory approvals, which could take 12-15 months to completed.
"Historically, while the CV business has been generating healthy cash flows, the PV business has witnessed challenges in consistent cash flow generation due to its high spending on product development and the re-building phase in its market positioning," Emkay Global said.
Nomura India suggested an unchanged price target of Rs 1,057 on Tata Motors. This brokerage, however, believes that the Tata Motors PV business potential to create better value over the next few years. The CV business in the future can see some more re-rating driven by its improving market share and profitability, Nomura said.