Tata Motors’ shares surpass Rs 1,000 post demerger news, surging almost 5%

Following market hours on March 4, Tata Motors declared its demerger into two listed firms. One will focus on commercial vehicles and related investments, while the other will handle passenger vehicles, including electric vehicles and JLR, along with their investments. Tata Motors’ shares ended the day down by 0.12% at 987.20, while the BSE Sensex closed 0.09% higher at 73,872.

Tata Motors, in a regulatory disclosure, assured that all shareholders will maintain the same ownership in both listed entities. The company noted that its commercial vehicles, passenger vehicles (including electric vehicles), and Jaguar Land Rover divisions have performed well under separate strategies. Since 2021, each business has been led by its own CEO. Tata Motors anticipates the demerger to conclude within 12-15 months, affirming no negative effects on employees, customers, or business associates.

Sharad Avasthi, Head of Research (PCG) at SMIFS, commented on the Tata Motors demerger, stating, “This move is beneficial as the commercial vehicle (CV) and passenger vehicle (PV) sectors operate at varying paces. The CV industry is heavily influenced by industrial factors and long-term logistics trends. Conversely, the passenger vehicle industry, especially in India, is less cyclical. Additionally, on the JLR side, they stand to gain in terms of valuations due to the diverse growth prospects compared to larger global players.”

He explained that the passenger vehicle (PV) segment is likely to receive a higher valuation compared to the commercial vehicle (CV) segment. Currently, Tata Motors trades at 9-11 times EV/Ebitda as a consolidated entity. “Following the split, the passenger vehicle division is expected to command a premium over the CV segment, thus enhancing the company’s overall valuation,” Avasthi remarked.

Tata Motors’ shares have surged by 154% since January 2023, outpacing the 21% gain in the BSE Sensex during the same period. When questioned if there’s further potential in Tata Motors’ consolidated business, Avasthi indicated that most positives have already been priced in. “Once the demerger occurs, the PV business (excluding JLR) is anticipated to garner a higher valuation compared to the entire business,” he noted. “The upcoming launches planned for the next 1-1.5 years should be particularly beneficial, primarily for the PV segment. Additionally, debt reduction efforts over the next 1-1.5 years will be significant. Although the consolidated entity is currently trading at a discount, there’s a possibility that the merged entity could command higher multiples, indicating continued valuation comfort,” Avasthi concluded.

Recently, Tata Motors reported sales of 86,406 vehicles in February 2024, up 8% from February 2023. Domestic sales totaled 84,834 units, with a 9% year-on-year increase. While domestic commercial vehicle sales declined by 4% to 33,576 units, domestic passenger vehicle sales saw a 20% year-on-year growth, reaching 51,267 units.

Prashanth Tapse, Senior VP (Research) at Mehta Equities, expressed optimism about the demerger news, considering it a strategic move that will empower each segment and drive higher growth with increased visibility. He highlighted the growth opportunities in the passenger vehicle (PV), electric vehicle (EV), and Jaguar Land Rover (JLR) segments, particularly in EVs, autonomous vehicles, and vehicle software.

Tapse remains positive about Tata Motors as a long-term investment. He noted that the commercial vehicles business and related investments will form one entity, alongside the vehicle financing business and Tata Technologies. However, he emphasized the need for more clarity on the specifics of this arrangement before drawing conclusions.

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