Tata Motors races to new high on demerger plans

Tata Motors’ management might have decided to demerge its passenger vehicle (PV) and commercial vehicle (CV) businesses, but most domestic analysts do not see great potential in the stock price as they see only a “limited upside” following the sharp run-up in the price recently. The stock of Tata Motors closed at ₹1,021.95 on Tuesday, up 3.52 per cent on the BSE. During the day, the stock rose as high as 8 per cent to hit an all-time high of ₹1,065.60.

The stock was the biggest gainer among the Sensex and Nifty constituents for the day. Its market capitalisation jumped ₹11,588.24 crore to ₹3,39,619.70 crore.

  • Read also: Tata Motors demerger: What it means for shareholders, investors

Ashwin Patil, Senior Research Analyst at LKP securities, told businessline that the demerger announcement shall split the business value into half and “should enable focused approach and flexibility,” adding, “since it’s an equal split, we can’t take a call on valuations.” However, the brokerage stayed “positive on the stock”.

Most analysts said the move will simplify cash flow utilisation, thus making it a “sentimentally-positive” one.

While Axis Securities called it an incremental step, Motilal Oswal, in its report, hailed the demerger as “a step in the right direction” but added that the brokerage does “not foresee any need to revisit” its target price, which is already based on SoTP valuation. Its target price is ₹1,000, while the brokerage has downgraded the stock to Neutral from Buy.

Kumar Rakesh, Analyst – IT & Auto, BNP Paribas, said, “This is a further step in the direction of streamlining Tata Motors’ organisation and capital structure, which started with American Depository Shares delisting, followed by plans of Differential Voting Rights delisting and now the announcement of separate listing of the PV and CV businesses.”

“We think JLR’s turnaround to become a modern luxury brand offers upside potential to our margin and FCF expectations. Further, despite the recent re-rating, TTMT is trading at an attractive FY25E FCF yield, highest in our coverage. TTMT is our sector top pick,” he said.

Motilal Oswal said the stock has significantly outperformed key indices with 204 per cent return in the last three years vs about 50 per cent return in the Nifty, on the back of a strong performance across its key business segments. “Also, we have already factored in most of the positive triggers in our estimates.”

Though most analysts had opted for a downward revision of both recommendation and TP, Emkay Global upgraded its TP to ₹950 from ₹925 while downgrading its recommendation to “Reduce” (Add).

“While we do not envisage major changes in the fundamentals due to this demerger (as the two businesses were operating largely independently with separate reporting and their respective CEOs), we revise our SOTP-based TP upward to factor in 10 per cent higher multiple for the CV business to 10x EV/EBITDA vs 9x earlier (~10 per cent premium to pure-play CV player Ashok Leyland) for potentially pure-play on CVs with higher scale and market share gains,” it said in its report.

Global analysts’ view

However, some global brokerages believed the demerger move could lead to “better value discovery”. Morgan Stanley said, “Demerger reflects confidence in PV business being self-sustaining and could help in better value discovery.” It assigned an Overweight rating on the stock with a TP of ₹1,013. JP Morgan, too, had come out with an ‘Overweight’ rating, assigning a TP of ₹1,000.

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