Tata Motors business divisions come to a fork in the road

While Tata Motors’ commercial vehicles (CV) unit builds trucks, vans and buses, the passenger vehicles (PV) divisions makes cars, SUVs and electric vehicles (EV). The PV division also includes Jaguar Land-Rover (JLR), the British luxury

carmaker that fetches over 80% of its revenue.

“The three automotive business units are now operating independently and delivering consistent performance. This demerger will help them better capitalize on the opportunities provided by the market by enhancing their focus and agility,” Tata Motors chairman N. Chandrasekaran said.

While the PV unit of Tata Motors is led by Shailesh Chandra, the CV division is headed by Girish Wagh, and JLR is steered by Adrian Mardell.

The demerger will be implemented through a scheme of arrangement to be filed before the National Company Law Tribunal, and the company hopes to complete the exercise over the next 12-15 months. All shareholders of Tata Motors will have identical shareholding in both the listed entities.

Starting out as a bus and truckmaker eight decades ago, Tata Motors ventured into passenger vehicles in 1991 with the Tata Sierra. This was followed by several models in the PV space, followed by the Tata Indica in 1998, marking a serious turn to car making. In 2008, Tata Motors acquired luxury carmaker JLR and rolled out Tata Nano, a micro-car. The Tata Nexon EV, rolled out in 2020, is India’s largest selling electric car.

For the company that was once reliant on cash flows from its CV business, the demerger underlines the strength of the PV unit and JLR’s capability to sustain positive cash flow independently, after an aggressive turnaround strategy spanning the last few years. This also comes at a pivotal moment when its EV business is closing in on profitability.

Financial services firm BNP Paribas values Tata Motors’ India PV and CV businesses at ₹585 and ₹335 per share ($27 billion and $5 billion respectively), which are a discount to listed peers Maruti Suzuki and Ashok Leyland; hence, the Street has been awaiting a demerger to unlock the value of these businesses for long.

However, since JLR fetches the bulk of Tata Motors’ PV business, true value unlocking for the India PV business is likely only if Tata Motors decides to de-merge JLR from its domestic PV and EV businesses, an analyst said on condition of anonymity.

The demerger follows the earlier separation of PV and EV businesses in 2022, and aims to enable more targeted strategies and operations for each segment, Tata Motors said in a press release. Chandrasekaran noted that the decision aligns with the independent and consistent performance of the three automotive business units – JLR, CVs and PVs, operating since 2021.

“We have long argued that Tata Motors’ valuation when looked as sum-of-the-parts looks attractive in comparison to peers. While the recent rally has narrowed the gap, it still offers value unlocking potential, especially in the PV business. Moreover, the stock offers the highest free cash flow yield in our coverage, despite the recent sharp rally in the stock. We see Mahindra & Mahindra also to have high value unlocking potential if its tractor and automotive businesses are listed separately”, Kumar Rakesh, analyst, India auto & IT, BNP Paribas said.

Demergers traditionally impress the market as they help in unlocking value, said Rajesh Palviya, senior vice president at Axis Securities. He predicts a potential 5% gap-up opening in the Tata Motors’ stock following a recent 27% rally this calendar year.

Experts anticipate a potential listing of Tata Motors’ EV businesses in the next 2-3 years, aligning with the broader industry trend of specialized entities focusing on emerging opportunities globally, at a time India has emerged as the world’s third largest passenger vehicle market – prompting IPO plans by rival Hyundai Motor India Ltd. The demerger logically separates CV and PV businesses, allowing the latter to capitalize on synergies in areas like EVs, autonomous vehicles, and vehicle software, the company said.

Tata had Motors converted its differential voting rights (DVR) shares to ordinary shares in December, and delisted its American Depository Receipts (ADRs) in January.

Private equity firm TPG in 2021 had invested nearly $1 billion in Tata Motors’ EV business, valuing it at just over $9 billion. Analysts expect that TPG’s involvement might trigger an exit strategy for the firm through an eventual listing of the EV business in a couple of years.