Tata Motors demerger: Will it bode well for passenger vehicle and commercial vehicle segments?

The demerger announcement by automobile company Tata Motors has been on the anvil for a while now. While the spin-off into two independent listed entities—one focused on personal vehicles (EV and JLR) and another on the commercial vehicle segment- is seen to unlock value for shareholders, how will the action impact the two new companies and Tata Motors as a whole, here is a take on it.

What is the demerger news?

Tata Motors, which currently encompasses all the segments, will be spun off into two listed companies. One will include all the commercial vehicle, equipment, vehicle financing,Tata Technologies, and allied investments, and the other company will comprise the company’s passenger vehicle cars, electric vehicles (JLR) and its global Jaguar and Landrover (JLR) business. 

Zee Managing Editor Anil Singhvi stated that the company has been strategically making decisions that are in the interest of shareholders and not the company’s promoters.

The expert pegs the fair value of the company at Rs 1100 and suggests investors to hold the stock time-wise for a decent upside.

The demerger may not result in any immediate change in the Street's valuation approach, analysts at Nomura said, adding that in the medium term, businesses should still be able to pursue their respective strategies with greater freedom, a Reuters report said.

How will the move benefit the company’s PV or commercial segment?

Ambareesh Baliga, an independent consultant, told Zee Business that the company’s passenger vehicles (PV) segment can secure better valuations due to the EV tag. He added that though the CV segment too will have city buses that are EVs, their quantum is smaller. As a whole, he views the demerger move as wealth accretive as whenever there is merger- the sum of parts is higher than the earlier market valuation.

Ishan Tanna, an independent analyst registered with Sebi said that looking forward, the CV part could be a good investment when the economy is doing well. This split is good news for shareholders. The expert added that the demerger proposal of sharing out the shares equally among shareholders, makes it simpler for the company to use cash without needing to value each one separately.

“But, this decision is already based on SoTP valuation. Even though it considers many good things that could happen, the potential for making more money is limited. It depends on how much demand there is overall in the future. JLR mostly does business in the US, Europe, and China, while the commercial vehicle (CV) side goes up and down with economic cycles,” he remarked.