The stock is, however, already trading above the target prices of both the global brokerages (Morgan Stanley’s Rs 1,013 and JP Morgan’s Rs 1,000).
While JP Morgan said the demerger might lead to better value discovery, Morgan Stanley said the move reflects confidence in PV business being self-sustaining and could help in better value discovery.
The demerger could take another 12-15 months to complete after which all shareholders of the company shall continue to have identical shareholding in both the listed entities.
“We believe this development signifies management’s confidence that the two businesses (CVs and PVs) will continue to operate independently with greater agility and self-sustaining cash flows (particularly the PV business). Historically, while the CV business has been generating healthy cash flows, the PV business has witnessed challenges in consistent cash flow generation due to its high spending on product development and the re-building phase in its market positioning,” Emkay Global’s Chirag Jain said.
The brokerage has increased its target price to Rs 950 downgrade to reduce its rating after the recent run-up.Explaining the rationale behind the demerger, Tata Motors said while there are limited synergies between Commercial Vehicles (CV) and Passenger Vehicles (PV) businesses, there are considerable synergies to be harnessed across PV, EV and JLR particularly in the areas of EVs, autonomous vehicles, and vehicle software which the demerger will help secure.Since 2021, three businesses – Commercial Vehicles (CV), Passenger Vehicles (PV+EV), and Jaguar Land Rover (JLR) businesses of Tata Motors – these businesses have been operating independently under their respective CEOs.
Nomura said TaMo’s PV business has more potential to create value over the next few years as it has seen a remarkable turnaround after 2020 with market share ramping up from mid-single digits to 13.5% currently.
“While currently TTMT’s PV business EBITDA margins are ~6.5%, the ICE margins have already improved to ~9.4% in Q3FY24 but the negative EV margins (-8.2% in Q3) pull them down. We expect that EV margins will improve over time as most of the losses come from product development costs,” Nomura said.
The brokerage has an unchanged target price of Rs 1,057 on the Nifty stock.
Motilal Oswal downgraded the stock to neutral with an unchanged target price of Rs 1,000 saying that all the positives are already factored in.
“While the demerger seems to be a step in the right direction, we do not foresee any need to revisit our target price, which is already based on SoTP valuation. Moreover, despite factoring in most of the positive triggers in our estimates, we get limited upside given the recent sharp run-up in the stock,” it said.
Once the demerger process is complete, Tata Motors PV will be pitched directly against market leader Maruti, with the global ammunition in the form of JLR and bridge the gap on valuation front.
“With Hyundai’s listing on the cards and M&M as the fourth rival, the tussle in the PV space will be interesting to watch and can give an investor a fair choice to select between four of them. On the CV front, TaMo will compete straightaway with the pure play domestic player Ashok Leyland,” said Ashwin Patil, Senior Research Analyst at LKP Securities.
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