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The board of Tata Motors Ltd (TML) on Monday approved a proposal to demerge the automobile maker into two separate listed companies. One entity will house the commercial vehicles (CV) business and its related investments, while the other will encompass the passenger vehicles (PV) businesses, including domestic PV, electric vehicle (EV), Jaguar Land Rover (JLR), and their related investments.
According to industry watchers and analysts, this is the “right time” for the company to segregate its passenger and commercial vehicle businesses, thereby unlocking value for the EV business. However, they do not anticipate this move as a precursor to listing of the JLR and EV businesses separately at a later date.
The announcement came after market hours. The TML stock concluded the day's trade marginally down at Rs 987.2 per share on the BSE.
The demerger will be executed through a National Company Law Tribunal (NCLT) scheme of arrangement. All TML shareholders will maintain identical shareholding in both the listed entities. The NCLT scheme of arrangement for the demerger will be presented to the TML board of directors for approval in the coming months, and it will be subject to necessary shareholder, creditor, and regulatory approvals, which could take an additional 12-15 months. The company assured that the demerger will not adversely affect employees, customers, or business partners.
N Chandrasekaran, chairman of the board of Tata Sons, said: “Tata Motors has scripted a strong turnaround in the past few years.”
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He added, “The three automotive business units are now operating independently and delivering consistent performance. This demerger will help them better capitalise on the opportunities provided by the market by enhancing their focus and agility. This will lead to a superior experience for our customers, better growth prospects for our employees, and enhanced value for our shareholders.”
Since 2021, these businesses — PV (ICE and EV), JLR, and CV — have been operating independently under their respective CEOs. TML announced on Monday that these businesses have demonstrated strong performance by “successfully” implementing distinct strategies.
The company further stated that the demerger is a “logical progression” of the subsidiarisation of the PV and EV businesses carried out earlier in 2022. It will further “empower” the respective businesses to pursue their strategies, deliver higher growth with greater agility, and reinforce accountability.
“Furthermore, while there are limited synergies between the CV and PV businesses, there are considerable synergies to be harnessed across PV, EV, and JLR, particularly in the areas of EVs, autonomous vehicles, and vehicle software. The demerger will help secure these,” it said.
Analysing the rationale behind the demerger, Deven Choksey, managing director, DRChoksey FinServ told Business Standard: “The electric vehicle business, which is a separately carved out entity, has an investment demand of around $2 billion for development of portfolio and growth. This is the right time to demerge the PV and CV businesses to unlock valuations. As an industry trend, EV companies are fetching good valuations. Tata Motors’ PV portfolio, which includes JLR (which has announced plans of going electric by 2025), EV business and its domestic ICE business, would be a fantastic proposition for attracting investors. As a combined PV-CV entity that is unlikely.”
Choksey further said: “If one looks at the profitability numbers, JLR and domestic PV businesses together are estimated to post Rs 20,000-22000 crore PBT in FY24. The PV business got back in black (after seven quarters) in Q3FY23, and has been going well from there.”
Analysts also felt that since the CV business is impacted by cyclicality, this move made the PV business more attractive to investors, rather than a combined entity.
Deepak Jasani, head of retail research, HDFC Securities said: “The CV business is more cyclical than the PV business -- two or three good years are followed by two or three dull years. Moreover, the PV business has gained traction in the past few quarters. If they want to invite a partner in any of these businesses, it's difficult to do so in a merged entity as someone who is interested in the PV business may not be interested in the CV business and vice-versa.”
On whether he felt there was a need to demerge JLR and EV business arms, as well, Jasani said that it seems unlikely as a value proposition. “JLR business has a dependence on the Chinese and US markets, but the Indian PV market is relatively steady. Therefore, having the JLR, ICE and EV businesses together makes a better proposition,” he added.
For the trailing 12-month period until December 2023, the JLR business leads both in terms of revenue as well as margin; it posted Rs 2.91 trillion in revenue in TTM 2023 with an Ebitda margin of 15.4 per cent. The PV business revenue was Rs 50,016 crore with an Ebitda margin of 6.4 per cent, and the CV business posted revenue of Rs 78,441 crore and an Ebitda margin of 10.3 per cent.
Meanwhile, the unwinding of the differential voting rights (DVR) shares programme is expected to be completed before this demerger.
Last July, Tata Motors had announced the termination of its differential voting rights (DVR) or A-share programme — bringing down curtains on an innovative fund-raising instrument that failed to take off on Dalal Street. The board had approved a scheme whereby seven ordinary shares of the company would be issued for every 10 A-shares held and all its outstanding A-shares would stand cancelled. Jasani said: "The demerger could take 12-15 months and by then, the conversion of DVR could be completed."
