Tata Motors’ proposed demerger plan to separate its passenger vehicle (PV) and commercial vehicle (CV) business will help the company reap the best of both worlds, according to analysts tracking the stock. That is because the company’s passenger car division is already doing well because of its strong product offerings and at the same time, the macroeconomic environment is conducive for the growth of the CV segment. Investors, however, are more upbeat on the outlook for the passenger car division and the demerger will give them exposure to a pure-play passenger vehicle business.
Tata Motors on March 4 approved the demerger of the company’s business into two separate units, CV business and PV business. PVs include electric vehicles (EVs) and Jaguar Land Rover (JLR).
Sunny Agarwal, Head of Fundamental Equity Research at SBI Securities, said that after the demerger, the PV business may get re-rated due to a relatively better growth outlook and financial metric. This re-rating would be driven by standalone performance of the PV business. He further said that if Tata Motors wants to seek a strategic investor, the investor can invest in the PV business directly, rather than the less lucrative CV business, which is cyclical in nature and is seeing lower volumes.
There is a lot of improvement expected in margins, volumes, and realizations of the PV business as compared to the CV business, said Prassana Bidkar, fund manager at Rupeeting.
Also read How numbers stack up for Tata Motors’ CV and PV biz amidst its demerger
EBITDA margin for Tata Motors’ CV business was at 11.1 percent in Q3FY24 and is likely to remain at the same level. While the company’s PV business EBITDA margins were at 6.6 percent in Q3FY24 and are expected to reach a double-digit level and sustain positive cash flows, said the management.
Analysts said that new and consistent launches in the PV segment are expected to keep the demand strong for the segment. Tata Motors has planned the launch of Curve EV and Harrier EV in Q2FY25 and the ICE version of Curve is set to be launched in Q3FY25.
Likely stock reaction
“Positives are already factored in the stock because the stock has been gaining in the last couple of days. Tata Motors will likely see a nearly 2-3 percent upside in the next one week,” said an auto analyst on the condition of anonymity.
Tata Motors shares have gained 5.12 percent in the last five days.
Agarwal said that the auto stock will see an upside in the near term due to the demerger announcement and then enter a phase of consolidation since the demerger process will take about 12-15 months to complete.
'The demerger looks like a good thing for the stock and we could see a positive reaction in the coming weeks which can attract investments as well. Investors who are willing to give higher valuations to the EV space would be more enticed than they initially would have been,” said another research analyst on the condition of anonymity.
Valuations
As per a DART report dated February 4, the share price for Tata Motors of Rs 1002 was divided into - the CV segment valued at Rs 221, the PV segment valued at Rs 143, and the JLR business valued at Rs 575.
"We think JLR’s turnaround to become a modern luxury brand offers upside potential to our margin and FCF expectations. We value PV business at Rs 583/share and CV business at Rs 336 per share", Kumar Rakesh of BNP Paribas told Moneycontrol.
The demerger will be implemented through an NCLT scheme of arrangement and all shareholders of Tata Motors will continue to have identical shareholding in both the listed entities. The creditor and regulatory approvals could take another 12-15 months to complete the demerger.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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