Tata Motors DVR spread contraction may be a good trade to initiate, says Nuvama

In 2023, Tata Motors stock was the best performer on the Nifty.

Given Tata Motors' spread, one can initiate the DVR spread contraction trade, starting with 25 percent to 30 percent of the position size and adding more with any further spread expansion in the near future, Nuvama Institutional Equities said in a report.

This comes after Tata Motors, India's leading automobile player, declared its decision to demerge its businesses into two separate listed entities, namely the commercial vehicles (CV) and passenger vehicles (PV) businesses.

Also read: How numbers stack up for Tata Motors’ CV and PV biz amidst its demerger

"The demerger is a logical progression of the subsidiarisation of PV and EV businesses done earlier in 2022 and shall further empower the respective businesses to pursue their respective strategies to deliver higher growths with greater agility while reinforcing accountability," the auto behemoth said in a statement.

Read more: Tata Motors demerger: JLR to pack a punch in PV valuations

The demerger is set to be executed through a scheme of arrangement at the National Company Law Tribunal (NCLT). All shareholders of TML will maintain identical shareholding in both listed entities resulting from the demerger, Tata Motors said. The company also mentioned that the required approvals from shareholders, creditors, and regulatory authorities for the demerger could potentially take an additional 12-15 months to complete.

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

"We expect the merger of shares should smoothly happen. One potential risk is TTMT's roll cost to contract substantially near completion, which might lead to lower spread realization. However, we've factored in a conservative 40 bps roll cost from the start to mitigate this risk", analysts at Nuvama added.

The news came after market hours, and the stock closed at Rs 988. In 2023, it was the best performer on the Nifty.

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