Tata Motors’ decision to demerge its commercial vehicle (CV) and passenger vehicles (PV) business as two separate entities is a “non-event” on an immediate basis and may not lead to any material value unlocking, analysts said.
The entire process could take about 15 months to complete and analysts await more clarity on other aspects.
The Board of Directors of Tata Motors, at its meeting on March 4, approved the proposal of demerger of the company into two separate listed companies, which will house the Commercial Vehicles business and its related investments in one entity and the Passenger Vehicles businesses including PV, EV, JLR and its related investments in another entity.
“The demerger will be implemented through an NCLT scheme of arrangement and all shareholders of Tata Motors shall continue to have identical shareholding in both the listed entities,” the auto major said in a release.
According to UBS, Tata Motors’ demerger simplifies the structure, but it does not see any unlocking of material value. The brokerage house has a ‘Sell’ rating on Tata Motors and a target price of ₹600 per share.
Morgan Stanley said the demerger reflects the company’s confidence in the PV segment being self-sustaining and could lead to better value-creation for Tata Motors. The brokerage has a target price of ₹1,013 on the stock.
Nuvama Institutional Equities believes the demerger to be a non-event on an immediate basis.
“Initially, it’s a non-event. We’re looking at a wait of around 15 months or so for this to materialize,” said Nuvama Institutional Equities.
Tata Motors is currently a member of all passive indices. However, the brokerage firm believes once the demerger is complete, with the smaller entity (CV business) becoming a standalone entity, it will exit Nifty 50 and Sensex.
“Think of it like JIO’s recent demerger from Reliance Industries, where JIO got listed separately and eventually (in the next few days) got excluded from the domestic indices,” Nuvama Equities said.
Meanwhile, the global indices, MSCI and FTSE, will evaluate the smaller entity’s market cap around listing to determine its eligibility.
Assuming the CV business gets around 25% of the total market cap, Nuvama Equities believes it should maintain its position in the passive indices. The key factors will be the market cap (Total and Free Float) of Tata Motors shares and the global cutoff levels.
“Limited synergies exist between CV and PV, while potential synergies abound across PV, EV, and JLR, particularly in EVs, autonomous vehicles, and vehicle software—a move the demerger will facilitate. In recent years, CV, PV (PV+EV), and JLR have operated independently under their respective CEOs. Sentiment remains positive as the demerger follows the logical subsidiary of PV and EV businesses initiated in 2022,” Nuvama Equities said.
Motilal Oswal Financial Services downgraded Tata Motors shares to ‘Neutral’ from ‘Buy’ with an unchanged target price of ₹1,000 per share given limited upside after the recent sharp run-up in the stock.
“On the back of a strong performance across its key business segments, the stock has significantly outperformed key indices with 204% return in the last 36 months vs. ~50% return in the Nifty. Also, we have already factored in most of the positive triggers in our estimates. While the business demerger seems to be a step in the right direction, we do not foresee any need to revisit our TP, which is already based on SoTP valuation,” said Motilal Oswal.
Tata Motors share price has seen a sharp rally recently on the back of improved financials and demand momentum. Tata Motors shares have gained over 11% in one month and more than 45% in three months. The stock is up more than 140% in one year.
At 9:40 am, Tata Motors shares were trading 4.78% higher at ₹1,034.40 apiece on the BSE.
