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Shares of Tata Motors hit a new 52-week high on Tuesday after the company decided to list its passenger vehicles and commercial vehicles businesses as separate entities on the stock exchanges through a demerger process. The decision is seen as a logical progression, given the disparate nature of the business entities.
Yet, after a phenomenal rally — the stock tripled in the past three years — what are future drivers of the stock's returns?
Expectations are running high on the company's passenger vehicles business. It has seen a remarkable turnaround. Jaguar Land Rover (JLR) is on the profitable growth path. In India, the company is ahead of the competition in electric cars and has successfully realigned its portfolio towards utility vehicles in internal combustion engines.
Even so, the electric vehicles (EV) business in India is yet to break even at the EBITDA level. And as the company maintains its investments in EVs, it is crucial that sales volumes keep up pace. According to Nomura, the company plans to launch new EV models and aspires to derive 50 percent of its volumes from EVs by 2030. “If Tata Motors is successful in its plan, there can be substantial value creation for the company,” add the Nomura analysts. In the nine months to December 2023, 12 percent of the company’s India sales came from EVs.
As such, the complexity in the passenger vehicles business will not go away completely. JLR, whose fortunes are influenced by the global automotive industry, will generate a large part of the vehicle company’s revenues and earnings. JLR is in the midst of an EV transition and faces competition from deep pocketed global automobile conglomerates.
“Of course, one cannot be sure how valuations may pan out for the PV entity alone. While the domestic market PV pure play Maruti commands a valuation of 15-17 times the estimated one-year forward earnings, global valuations for JLR’s peers such as Audi, BMW are in the mid-single digits (3-4 times earnings per share),” writes Vatsala Kamat. Do Read.
You can read our Research Team’s analysis of the demerger here.
In comparison, the commercial vehicles unit will provide a plain vanilla exposure to the domestic market. The company is a market leader in medium and heavy commercial vehicles and commands a large share of the overall industry. But the unit is prone to business cycles. For instance, demand is projected to soften in 2024.
To sum up, the demerger creates a global passenger vehicle company and an India-focussed commercial vehicle company. However, investors would do well to see the prospects in conjunction with current stock valuations and the transformation that is sweeping the global automobile industry.
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