Tata Motors Demerger: What It Means For Shareholders and Future Outlook

Tata Motors has captured the attention of investors with a pivotal strategic move. On Monday, March 4, the company's Board of Directors approved a plan to split Tata Motors into two separate entities, aiming to maximize growth and streamline operations. This decision underscores a clear strategy to enhance growth, agility, and strategic focus across its diverse business portfolio.

This announcement received a warm welcome from investors, as evident in the stock's performance the subsequent day. The stock experienced a significant uptick on Tuesday, soaring nearly 8% to hit an intraday peak of Rs 1065.6 on the National Stock Exchange of India (NSE).

The New Roadmap: Commercial and Passenger Vehicles Segments

The demerger creates two distinct entities. The first will concentrate on the Commercial Vehicles (CV) segment, covering all commercial vehicle operations and related investments. The second entity will pivot around the Passenger Vehicles (PV) business, including passenger cars, Electric Vehicles (EVs), and the iconic Jaguar Land Rover (JLR) brand, which accounts for over 80% of the firm’s revenue.

This strategic split is driven by a vision to foster growth, enhance operational agility, and ensure dedicated focus on the unique strategies of each business unit. With the CV, PV, and JLR segments each demonstrating strong performance and implementing distinct strategies under their respective CEOs since 2021, this demerger is poised to empower each entity with the flexibility needed to excel in the fast-evolving automotive landscape.

Unlocking Shareholder Value Through Strategic Focus

A critical aspect of this strategic realignment is its potential to unlock value for shareholders in the long term. By separating the cyclical CV business, which traditionally attracts lower valuation multiples, from the PV segment, the latter is positioned to potentially achieve a higher valuation multiple, especially with its focus on the burgeoning EV sector. Tata Motors has already established itself as a leader in this space, which is likely to attract premium valuation due to its growth prospects.

Moreover, the significant revival of JLR over the last two years, driven by strategic product introductions and cost-saving measures, has also improved the valuation outlook for the Passenger Vehicle (PV) segment. Tata Motors' stock price has seen a significant rise of approximately 125% over the last one year, reaching levels considered to be fair value. The proposed demerger is likely to further boost value in the long term, especially for the PV segment, which is set to benefit from its leading role in the EV and premium utility vehicle categories.

Tata Motors Share Price: Near-Term Impact

Tata Motors' decision to segregate its CV and PV operations follows a logical progression from earlier initiatives: the establishment of a dedicated EV vertical in mid-2018 and the separation of its domestic PV business into a distinct subsidiary, incorporating the EV division by the end of March 2020, coinciding with the onset of the Covid pandemic. With the recent announcement, the JLR business is now integrated into the PV segment, offering investors interested in domestic economic growth a clear choice with the CV division. 

This move aligns with Tata Motors' overall performance excellence across its PV, CV, EV, and JLR segments, which is reflected in the stock's impressive performance, more than doubling over the last year. While the announcement of the demerger might not have come as a complete surprise — possibly already factored into the stock price to a considerable extent — the true market valuation for each segment will become clear post-listing, which is expected to occur in a year or more. At that time, the market will provide a real appraisal, as no significant fundamental changes are anticipated given that both divisions have operated independently before this announcement.

Post-Demerger Shift: Tata Motors Index Status

Tata Motors, currently a part of all key passive indices, may see a change in its status following the completion of its demerger, leading to its commercial vehicle (CV) segment emerging as a separate entity. This development echoes the scenario faced by Jio Financial Services after its demerger from Reliance Industries, leading to its exclusion from major Indian benchmarks like the Nifty 50 and Sensex. 

The MSCI and FTSE indices will assess the market capitalization of the newly independent entity at the time of its listing to decide on its eligibility for inclusion. If the CV unit captures approximately 25% of Tata Motors' aggregate market capitalization, it could retain its place in these passive indices. The decision on eligibility will primarily be based on Tata Motors shares' market capitalization, both total and free float, in addition to global cutoff standards.

Conclusion

This strategic demerger not only provides clarity on the direction of each division but also enhances the potential for shareholder profits through unique and improved valuation approaches. Additionally, it allows investors the flexibility to invest in the segment that aligns with their strategic interests.

The separation process will be executed via an NCLT-approved scheme, ensuring all Tata Motors shareholders retain the same proportion of shares across both newly listed entities. The scheme, requiring approval from the Board of Directors, will be reviewed in the forthcoming months. It is contingent upon obtaining the necessary approvals from shareholders, creditors, and regulatory bodies, a process anticipated to take between 12 to 15 months to complete.

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