Informist, Tuesday, Mar 5, 2024
By Darshan Nakhwa and Anshul Choudhary
MUMBAI - Tata Motors Ltd's decision to demerge its passenger and commercial vehicle businesses may have been primarily driven by its desire to simplify the corporate structure, raise funds, and offer investors the choice to invest in a specific business, analysts and fund managers say. This decision by India's most valued automaker may also be aimed at creating an independent dividend policy and providing an exit for investors of the electric vehicle business.
In a bid to unlock value for its businesses, the Mumbai-headquartered company on Monday, post market hours, said it will house the commercial vehicles business and its related investment under one entity and the passenger vehicles operations, including electric vehicles, Jaguar Land Rover and their related investments, as another entity.
Post this announcement, its shares jumped nearly 8% to an intraday high of 1,065.60 rupees today. Later, they came off highs, and closed 3.5% higher at 1,021.90 rupees. Nearly 60 mln shares changed hands today, as against the six-month daily average volume of 10 mln shares. Since the start of 2024, the stock has risen over 31%.
"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," Tata Sons Chairman N. Chandrasekaran said in a press release. "This will lead to a superior experience for our customers, better growth prospects for our employees and enhanced value for our shareholders."
The announcement was largely expected, given that the company has been detailing performance in terms of volume, revenue, earnings before interest, tax, depreciation and amortisation, and EBITDA margin for all of its three businesses separately, said Abhishek Gaoshinde, deputy vice president-Research at Sharekhan.
Since 2021, these businesses have also been operating independently under their respective chief executive officers. In 2020, the vehicle manufacturer had announced its plan to hive off and transfer the entire passenger vehicle business to Tata Motors Passenger Vehicles Ltd, saying that this would help in providing a differentiated focus for the passenger and commercial vehicle businesses. The transfer of the company's passenger vehicle undertaking to Tata Motors Passenger Vehicles Ltd came into effect from 2022.
Subsequently, the company also incorporated a wholly-owned subsidiary, Tata Passenger Electric Mobility Ltd, to undertake the passenger electric mobility business. This subsidiary, in which TPG Rise Climate is an investor, has set a goal to invest $2 bln by 2026 to launch 10 new electric vehicles, build a dedicated battery electric vehicle architecture, support local manufacturers of key components and development of advanced automotive and battery technologies.
"The demerger is a logical progression of the subsidiarisation of passenger vehicle and electric vehicle businesses done earlier in 2022, and shall further empower the respective businesses to pursue their respective strategies to deliver higher growth with greater agility while reinforcing accountability," Tata Motors said in a press release. Furthermore, there are limited synergies between commercial vehicles and passenger vehicles businesses, but there are considerable synergies to be harnessed across passenger vehicles with internal combustion engines, electric vehicles, and JLR.
"There's nothing game-changing about this announcement. It is just corporate restructuring," a fund manager at a domestic investment firm told Informist on the condition of anonymity. "Tata Group is a big conglomerate and there's a lot of cross-holding in companies, so they are trying to simplify that."
According to Emkay Global Financial Services, this development signifies the management's confidence that the two businesses will continue to operate independently with greater agility and self-sustaining cash flows, particularly for the passenger vehicle business. Historically, while the commercial vehicle business has been generating healthy cash flows, the passenger vehicle 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, the financial services firm said in a note.
"Earlier, the commercial vehicle business was the more profitable business for the company which was funding the other two businesses when they were not profitable. Now, the passenger vehicle business has had a very good turnaround, which has given confidence to the company to go ahead with the demerger," a research analyst at a domestic brokerage said.
During 2022-23 (Apr-Mar), Tata Motors' JLR business accounted for nearly 65% of the company's consolidated revenue of 3.46 trln rupees, while commercial vehicles contributed around 20%, and passenger vehicles 14%. The company's consolidated profit before tax came in at 30.58 bln rupees for the period.
For the first nine months of 2023-24, Tata Motors has posted a topline of 3.18 trln rupees, of which 69?me from JLR, while commercial vehicles contributed 18% and passenger vehicles around 12%. The company has earned a profit before tax of 181.33 bln rupees for the period. The company's profit contribution from the passenger vehicle segment will look bigger after the demerger as JLR, electric vehicles and passenger vehicles will be housed under one entity.
DRChoksey FinServ's Managing Director Deven Choksey welcomed the company's decision saying, "It makes sense to demerge the company and ultimately have the entire business of electric vehicles and passenger vehicles housed under a separate company, so that they can get the advantage of raising money from investors who are dedicated to a particular segment."
"Another reason could be that they have raised some funding for the electric vehicles business, so they might want to provide an exit for these investors. There might be many things that play out here. It makes sense to ask the company where JLR fits into the entire scheme of things, considering they could have listed JLR separately," said the fund manager who spoke with Informist on the condition of anonymity.
In terms of value unlocking, analysts and fund managers believe the company may not see any significant upside. The Street has already valued "Tata Motors on the SOTP (sum-of-the-part) basis, where analysts give value to the individual business based on its performance," said Gaoshinde.
On investing based on sales cycles, analysts and fund managers believe the decision to demerge businesses may provide some flexibility to investors. The commercial vehicle sales cycle plays out differently from the passenger vehicles business. While the commercial vehicle sales cycle is reaching its pre-COVID peak now, the company may be hoping that the passenger vehicle sales cycle will continue to do well, led by strong demand for sport utility vehicles and electric passenger vehicles, said a fund manager.
"From an investors' perspective, they will have the flexibility to play passenger and commercial vehicle cycles separately (after the demerger)," said Gaoshinde. On giving dividends, "if the passenger vehicle business is making more profit and the company wants to pay dividends, then it can have an independent dividend policy, which is currently not there as shareholders are getting dividend on the combined entity. A negative or positive cycle of individual businesses could impact the dividend policy," he said.
On the position of Tata Motors in the benchmark indices Nifty 50 and Sensex, Nuvama Institutional Equities in a note said, Tata Motors is currently a part of all passive indices. Once the demerger is complete, with the smaller entity (commercial vehicle business) becoming a standalone entity, it will exit Nifty 50 and Sensex. "Think of it as Jio Financial Services' recent demerger from Reliance Industries Ltd, where Jio got listed separately and eventually got excluded from the domestic indices," the brokerage said.
"The passenger vehicle business has got a higher probability of making it to the Nifty 50 index. If you look at the sum-of-the-parts valuation of Tata Motors, the commercial vehicles business is less than one-third of the total valuation. So, whatever will be the market valuation, we can assume two-third will be on the other side, so it will make more sense for it to get listed," a fund manager said.
Analysts believe Tatas' commercial vehicle entity will likely trade at price-to-earnings ratio similar to that of its peer Ashok Leyland, with some expecting the former to have a slightly higher PE. Shares of Ashok Leyland are currently trading 17 times its 2024-25 (Apr-Mar) earnings, while Tata Motots is trading at 15 times its earnings.
Tata Motors is currently India's largest commercial vehicle maker and third-largest passenger vehicle manufacturer, and a market leader in the electric passenger vehicle segment. The announcement of restructuring comes almost a month after the company surpassed the country's largest carmaker Maruti Suzuki India Ltd in the stock market to become the most-valued automobile company in terms of market capitalisation.
In terms of sales volume, Tata Motors has sold 353,583 commercial vehicles in the first 11 months of 2023-24. In comparison, its closest rival Ashok Leyland has sold 171,817 units. In terms of revenue, while Tata Motors has reported a topline of 572.01 bln rupees for Apr-Dec from its commercial vehicle business, Ashok Leyland reported net sales of 288.09 bln rupees.
On the passenger vehicles front, for the nine months ended December, Tata Motors sales, including those of electric vehicles, came in at 417,844 units and JLR sales were at 291,113 units. In comparison, India's largest carmaker Maruti Suzuki sold 1.55 mln units during the period. In terms of revenue, while Tata Motors earned 379.23 bln rupees from the passenger vehicles vertical and 2.20 trln rupees from JLR, Maruti Suzuki reported a standalone topline of 1.03 trln rupees for Apr-Dec.
The course of the company's demerger will be time-consuming and will be implemented through a National Company Law Tribunal scheme of arrangement. All shareholders of the company will continue to have an identical shareholding in both the listed entities, Tata Motors said in a press release. The National Company Law Tribunal scheme of arrangement for the demerger will be placed before the company's board for approval in the coming months and will be subject to all necessary shareholder, creditor and regulatory approvals that could take another 12-15 months to complete. End
Informist Media Tel +91 (22) 6985-4000
Send comments to feedback@informistmedia.com
© Informist Media Pvt. Ltd. 2024. All rights reserved.