Tata Motors, one of India’s leading automakers, has announced a strategic demerger, splitting the company into two separate entities. This decision involves creating distinct businesses for commercial vehicles and passenger vehicles, including electric vehicles (EV) and the luxury car unit Jaguar Land Rover (JLR). The demerger, facilitated through an NCLT scheme of arrangement, is expected to take approximately 15 months for completion.
While the move aims to enhance focus and capitalize on specific opportunities in each segment, some analysts express reservations about an immediate unlocking of substantial value for shareholders. UBS, maintaining a ‘Sell’ rating on Tata Motors, suggests that the demerger simplifies the company’s structure but may not lead to significant value realization.
Nuvama Institutional Equities sees the demerger as a non-event in the short term, expecting a waiting period of around 15 months for tangible outcomes. They draw parallels with the recent demerger of Jio from Reliance Industries, where the separated entity eventually exited domestic indices.
Motilal Oswal Financial Services downgraded Tata Motors shares to ‘Neutral’ from ‘Buy,’ citing limited upside potential following the recent strong rally in the stock. Despite the positive performance across key business segments and improved financials, the demerger might not prompt a revision of their target price, which is already based on a Sum-of-the-Parts (SoTP) valuation.
Tata Motors’ share price has witnessed a remarkable rally, gaining over 45% in the last three months and more than 140% in the past year. While the demerger is viewed as a positive move for streamlining operations, its immediate impact on shareholder value and market dynamics remains a subject of observation.
At present, Tata Motors is part of various passive indices, but the demerger could lead to changes in its status within these indices, influencing market evaluations and eligibility criteria. The company’s market performance in the coming months, especially around the time of listing for the smaller entity (commercial vehicle business), will play a crucial role in determining its standing in global indices.
As the automotive industry undergoes strategic transformations, Tata Motors aims to leverage the demerger to harness synergies in electric vehicles, autonomous driving technology, and vehicle software. The company emphasizes the independent operations of commercial and passenger vehicle businesses, recognizing limited synergies between the two segments.
Investors and market analysts are keenly observing the unfolding developments, anticipating the long-term implications of Tata Motors’ strategic demerger.
