Tata Motors demerger aimed at unlocking better value for the two businesses  

There are limited synergies between the commercial vehicles and passenger vehicles businesses, Tata Motors said

Tata Motors' announcement on March 4 on its plan to demerge its passenger vehicles and commercial vehicles businesses into two separately listed entities is intended to unlock value for the two businesses, especially the passenger vehicle (PV) business, which will need larger investments going ahead as it builds an electric vehicles portfolio, analysts said.

To be sure, the company has been laying the roadmap for the demerger for a while. The PV unit was hived off into a separate subsidiary effective from January 2022, and within that the passenger electric mobility business was separated into a separate subsidiary - Tata Passenger Electric Mobility Limited (TPEML) in December 2021.

Announcing the demerger, Tata Motors said that over the past few years, the commercial vehicle (CV) and the PV businesses comprising its electric vehicles (EV) unit and Jaguar Land Rover (JLR) businesses have implemented distinct growth strategies and since 2021, these businesses have been operating independently under their respective CEOs.

The company said further that while there are limited synergies between the commercial vehicles and passenger vehicles businesses, there are considerable synergies to be harnessed across the PV, EV units and JLR, particularly in the areas of EVs, autonomous vehicles, and vehicle software which the demerger will help secure.  The demerger could take 12-15 months to complete and shareholders of Tata Motors will get one share in each in the demerged companies , it said.

“It will provide a sharper investment thesis for investors who want to play on the EV theme and should make the PV side of the business more attractive for investors,” said an investment banker, speaking on the condition of anonymity.

“Given the cyclical nature of the CV business, investors won’t have to worry about the CV business being a drag on the potentially high growth EV business under the passenger vehicles arm,” he said. The new structure, which separates the two businesses, will also provide Tata Motors better flexibility in onboarding strategic partners in the future into the passenger and EV businesses, he added.

“These three businesses combined will have large capex requirements going ahead and they will all require money. And electric vehicles command a better price to earnings multiples in the markets,” Deven Choksey, Managing Director of KR Choksey Shares and Securities, told Moneycontrol.

“The CV business is expanding, whether it is the infrastructure growth story, private sector capex through schemes like PLI or the overall focus of the government on improving logistics in the country. So, CVs are going to have a demand. If the CV business is growing at 10-12 percent then it will make sense for many investors” Choksey said further.

In the CV segment Tata Motors had 42 percent market share in FY23.  However the company’s overall market share, particularly in light goods vehicles and buses, has declined over the years. For fiscal 2023, CV wholesale volume grew by over 16 percent on-year, driven by healthy demand and new product launches

On the PV front, the company has seen significant turnaround in operations, led by new product launches, product re-engineering and footprint expansion leading to increased reliability and acceptance among customers. In fiscal 2023, its market share grew to 13.5 percent from below 5 percent in fiscal 2020.

Meanwhile,  analysts pointed to the possibility that the demerger will allow more flexibility to the companies to raise funds in the future as competition intensifies, especially in the passenger EV segment, where Tata Motors is currently the largest player.

“The company has been working to simplify its structure and unlock value from its investments to keep dry power ready,” said a senior investment banker who works closely with the Tata group.

In October last year, Tata Motors Limited entered into share purchase agreements to sell 9.9 percent stake in Tata Technologies Ltd (TTL) for an aggregate consideration of Rs 1,613.7 crore. Moneycontrol reported on January 8, citing sources, that Tata Group has begun talks to list Tata Autocomp Systems (TACO), the group’s auto components manufacturing business, in which Tata Motors owns 26 percent stake.