Tata Motors Announces Proposal to Split Business into Two Listed Entities, Stocks Surge

Shares of Tata Motors witnessed a significant surge of 8 percent during early trade, reaching a 52-week high, following the company’s board approval of a proposal to divide its business into two separate listed entities. According to the demerger plan, one of the split companies will handle the commercial vehicle business and its investments (CV) segment. The other company will focus on passenger vehicles, including electric vehicles, Jaguar Land Rover, and related investments (PV) segment. The management hasn’t given a timeline for the demerger yet. Also, there’s no clarity on where Tata Technologies (recently listed) and Freight Tiger (acquired in October 2023) will be placed.

Chairman N Chandrasekaran said, “Tata Motors has scripted a strong turnaround in the last few years. The three automotive business units are now operating independently and delivering consistent performance. This demerger will help them better capitalize on the opportunities provided by the market by enhancing their focus and agility. This will lead to a superior experience for our customers, better growth prospects for our employees and, enhanced value for our shareholders.”

The market responded well to this news, with the stock reaching a high for the year after the announcement. This notable increase in Tata Motors’ stock value was driven by positive sentiments from various brokerages regarding the demerger proposal.

A prominent brokerage firm, set a target price of Rs. 1,013, indicating positive expectations for the company’s future performance and optimism about Tata Motors’ decision. Morgan Stanley expressed that the strategic move reflects the company’s confidence in the sustainability of the personal vehicle (PV) segment. The brokerage also emphasized the synergies between Tata Motors’ British arm Jaguar and Land Rover and its domestic PV business, particularly in the electric vehicle (EV) sector. This collaboration anticipated to yield favorable outcomes for both segments.

Nomura, another leading brokerage, maintained a “buy” recommendation for TATA Motors with a target price of Rs. 1,057. Nomura highlighted that the split would provide individual businesses with increased flexibility to pursue their respective strategies. It also noted the significant potential for value creation within the PV business, particularly after a remarkable turnaround post-2020.

However, not all brokerages are bullish on the demerger’s impact on shareholder value. Investec, for instance, maintained a “hold” rating anticipating no significant change on valuations. According to the brokerage, the demerger “creates a pure CV play and a global PV play.” InCred holds a “reduce” recommendation, suggesting the PV business might be valued at 62% post-demerger, compared to 38% for CV. They anticipate no significant business changes overall.

Implementation Plans for Demerger:

The proposed demerger will be implemented through an NCLT (National Company Law Tribunal) scheme of arrangement. Upon completion of the demerger, all shareholders of Tata Motors Limited (TML) will maintain identical shareholding in both resulting listed entities. However, Tata Motors has cautioned that obtaining necessary approvals from shareholders, creditors, and regulatory authorities for the demerger could extend the timeline by an additional 12-15 months. The demerger will have no adverse impact on employees, customers, and our business partners.