Demerger Effect! Tata Motors hits fresh high; stock jumps 8%

Tata Motors demerger: Tata Motors was the stock of the day on Tuesday, March 5, as, in a big announcement on Monday after market hours, it announced the demerger of its company into two separate entities.

The stock hit a fresh record high in the early deals. At around 9:39 am, shares of the company traded with gains of 4.72 per cent or Rs 46.6, at Rs 1,033.8, while at the day's high, it scaled levels of Rs 1,065.6, up 7.94 per cent on the BSE.

“The Board of Directors of Tata Motors Limited (TML), at its meeting today, has approved the proposal of demerger of Tata Motors Ltd into two separate listed companies: A) the commercial vehicle business and its related investments in one entity; and B) the passenger vehicle businesses, including PV, EV, and JLR, and their related investments in another entity. The demerger will be implemented through an NCLT scheme of arrangement, and all shareholders of TML shall continue to have identical shareholding in both the listed entities,” said the company in its filing on Monday.

“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 capitalise 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," said the company's chairman.

"The NCLT scheme of arrangement for the demerger shall be placed before the TML Board of Directors for approval in the coming months and will be subject to all necessary shareholder, creditor, and regulatory approvals, which could take a further 12–15 months to complete. The demerger will have no adverse impact on employees, customers, or our business partners," added the company's filing.

How do global brokerages see the move by the Tata Group company?

Brokerage Morgan Stanley has maintained its overweight call with a target of Rs 1,013. The brokerage held that the demerger reflects confidence in the PV business being self-sustaining. It also added that the new strategy can help in better value discovery. JLR and India PV will also have synergies in the electric vehicle era, added Morgan Stanley.

Macquarie also maintained an outperform call with a target of Rs 1,028, stating that the pure play will enable better value discovery. The conglomerate structure was constraining valuation upside, while the pure-play format will lend investment flexibility to investors. It further said that the PV segment valuation discount to Maruti could also narrow if Tata delivers on market share gains or better margins.

JP Morgan maintained an overweight stance with a target of Rs 1,000.
 
UBS, on the contrary, maintained a sell with a target of Rs 600. The brokerage noted that the company's CV and PV business, which includes India EV and JLR, will simplify the corporate structure, but it does not see any material value. Further, it said it awaits more clarity on other aspects.