Tata Motors demerger: Here's what it means for shareholders, employees

Automobile major Tata Motors on March 4 post-market hours announced the demerger of the company into two separate listed firms. One entity will house commercial vehicle (CV) business and its related investments, while the other will house passenger vehicle businesses, including passenger vehicles, electric vehicles and JRL and their related investments. Earlier during the day, shares of Tata Motors settled 0.12% lower at 987.20 on Monday. On the other hand, the benchmark BSE Sensex closed 0.09% higher at 73,872.

In a regulatory filing, Tata Motors said that all shareholders of Tata Motors shall continue to have identical shareholdings in both the listed entities. “Over the past few years, the commercial vehicles (CV), passenger vehicles (PV+EV), and Jaguar Land Rover (JLR) businesses of Tata Motors have delivered a strong performance by successfully implementing distinct strategies. Since 2021, these businesses have been operating independently under their respective CEOs,” Tata Motors said adding the demerger could take a further 12-15 months to complete and it will have no adverse impact on employees, customers and business partners.

Sharing his view on Tata Motors demerger, Sharad Avasthi, Head of Research (PCG) at SMIFS said, “This is a good move by the company as both industries (CV and PV) move at different velocities. CV industry is more dependent on the industrial side and how logistics play out over a longer period of time. On the other hand, the passenger vehicle industry is less cyclical, particularly in India. JLR side they would benefit more in terms of valuations because the growth for JLR in some parts is very different compared with global larger players.”

He further added that the PV industry would get a much better valuation than the CV industry. Tata Motors currently trades at 9-11 times EV/Ebitda which is a consolidated entity. “After the breakup, the passenger vehicle segment would get a premium compared with the CV side of the business. This would result in improvement of the overall valuation of the company,” Avasthi said.

Shares of Tata Motors have soared 154% since January 2023, while BSE Sensex has gained 21% during the same period. Asked, is there more steam left in the consolidated business of Tata Motors? Avasthi added that most of the positives have already been factored in. “Once the demerger happens PV business (ex-JLR) should get a much better valuation compared with the total business. The recent launches they have planned for the next 1-1.5 years that should be very positive for them largely on the PV side. Over the next 1-1.5 years debt side of business will also be curtailed substantially. The consolidated entity is still trading at a discount. There is a probability that the merged entity might be looking at high multiples. The valuation comfort is still there.” Avasthi added.

Of late, Tata Motors announced that sales in the domestic and international market for February 2024 stood at 86,406 vehicles, compared to 79,705 units during February 2023, recording a growth of 8%. Total domestic sales stood at 84,834 units, up 9% YoY. On the other hand, domestic commercial vehicle sales declined 4% to 33,576 units while domestic passenger vehicle sales grew 20% YoY to 51,267 units in February 2024.

Prashanth Tapse, Senior VP (Research), Mehta Equities said, “We believe this demerger news is a much-awaited strategic move and logical progression to further empower each segment and deliver higher growths with greater visibility. We continue to see high growth opportunities in segment PV, EV and JLR, particularly in the areas of EVs, autonomous vehicles and vehicle software which this move will help secure high focus. We think this demerger will help Tata Motors to better capitalise on the growth opportunities and enhanced value for long-term shareholders.”

Tapse continues to remain positive on Tata Motors as a long-term story. “The commercial vehicles business and its related investments will also be spun into one entity like the vehicle financing business, Tata Technologies etc. but it would be too early to comment on how this will look like. We need to wait and watch for more clarity on how they would go ahead,” Tapse said.