Tata Motors demerger a positive move, but no immediate gains seen

The demerger of Tata Motors will take around 12-15 months.

The company will be transformed into two listed firms with the commercial vehicles (CVs) business in one and passenger vehicles (PVs), including Jaguar Land Rover (JLR), in the other.

Shareholders will get one share in each entity for every one share they hold on the record date.

The demerger could eventually be positive and help unlock valuations. But it may not have an immediate impact on the valuations since the positives may already be factored into the share price.

The PV entity will hold considerably higher revenue due to the fact that JLR, which contributes the largest chunk of consolidated revenues (around 65 per cent) is part of that vertical. In aggregate, PVs contribute about 79 per cent of the consolidated revenues and CVs have around 21 per cent share.

Analysts see volume growth rising in the Indian PV business by around 8-9 per cent in each of the next two financial years.

There could also be some margin expansion but earnings before interest, taxes, depreciation and amortisation (Ebitda) margin will likely be around 7-8 per cent. The company’s Indian PV segment is vying for number two position with Hyundai.

The bigger upside here could be JLR, where there is estimated to be 7 per cent volume growth in FY25 and FY26 each, after 25 per cent volume growth in FY24.

Margin expansion would be higher assuming demand improves in key global markets and Ebitda margin could be above 17 per cent.

In the India CV business, volume growth will be slightly lower, around 6 per cent, after a small decline / flat volumes in FY24. Ebitda margin expansion over FY24-26 could take the margin to 11.5 per cent.

The total business should be net cash positive by FY26. The implication is that both entities would have to be profitable for this move.

Apart from potential value unlocking, it’s hard to see where this move could result in synergies in the short term.

It may make it easier for either the entity to tap the market for funds to invest in expansions or set up new business lines like electric buses. It may make it easier for both verticals to focus on their respective business with dedicated boards, and better operational dynamics.

Further down the line, Tata Motors could look to spin off and list the EV passenger vehicles, a business where it holds dominant market share, as a separate entity.

But it is hard to assign a value to all such possibilities at this instant.
 

The share price is up 2x in the last 36 months, which is far better than the index return. Given that there are no direct visible operational improvements as a result of this demerger and both verticals are well run, we may assume that the valuations of the separate entities will not be significantly higher than the sum-of-the-parts.

Bloomberg consensus seems to be that the demerger announcement does not change much at this moment.

Four of the eight analysts polled since Monday have ‘buy/outperform’ rating, three have ‘neutral/hold’ and one has ‘reduce’ on the stock.

Their average one-year target price is Rs 987.25. Tata Motors gained 3.5 per cent on Tuesday to close at Rs 1,021.95 on the BSE.