Tata Motors demerger: What does it signal, what’s in it for shareholders?

The decision was announced after market hours on Monday. The demerger proposal will be implemented through a National Company Law Tribunal (NCLT) Scheme of Arrangement, with all shareholders of Tata Motors continuing to have identical shareholding in both the listed entities.

What is Tata Motors seeking to achieve from the demerger?

The demerger reflects the company’s confidence that the passenger vehicles (PV) segment can be self-sustaining, and the move to demerge into two entities can lead to better value-creation for Tata Motors. There are two additional aspects here.

One, that the company’s British luxury car JLR division accounts for more than three-quarters of the revenues of the PV division, and the EV division — a market leader in that segment — is seen as inching towards profitability on a standalone basis. It could be a matter of time before both these divisions are also spun off.

Two, the company’s commercial vehicles (CV) division, which makes trucks, vans, and buses, is also the national leader in the segment, and is now actively working on a variety of platforms and fuel configurations, including electrics, hydrogen internal combustion, and hydrogen fuel cell.

The ability and potential to unlock value from what is currently an unwieldy range of vehicle platforms, all housed under one roof with revenues totalling more than Rs 4.20 lakh crore, seems to be the trigger for the move.

And what is Tata Motors’ own explanation for the move?

The company says the demerger is a logical progression of the subsidiarisation of the PV and EV businesses carried out earlier in 2022, and that it will further empower the businesses to pursue their respective strategies to deliver higher growths with greater agility, while reinforcing accountability. Since 2021, these businesses have been operating independently under their different CEOs — Sailesh Chandra heads the PV division, and Girish Wagh heads the CV business.

Also, while there are limited synergies between the CV and 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. Their volume performances, margins, drivers, and competitors are totally diverse.

What’s in the move for shareholders of the company?

Shareholders of TML will continue to have identical shareholding in both the listed entities. This means if a shareholder has 100 shares of TML, she will get 100 shares each in the two demerged companies. However, the company is yet to announce the demerger formalities.

The NCLT Scheme of Arrangement for the demerger will be placed before the TML board of directors for approval in the coming months, and will be subject to all necessary shareholder, creditor, and regulatory approvals which could take a further 12-15 months to complete. The demerger will have no adverse impact on employees, customers, and its business partners, the company said.

TML shares have risen by more than 150% over the last one year.

How have experts reacted to the demerger move?

The reaction has been mixed. While UBS said that Tata Motors’ demerger simplifies the company’s overall structure, it does not see any major unlocking of material value, Morgan Stanley said the move could lead to better value-creation for Tata Motors.

From the competition point of view, the PV business can now directly compete with market leader Maruti, with global ammunition in the form of JLR, and bridge the valuation gap. With Hyundai’s listing on the cards, and M&M as the fourth player in the game, the PV space will be interesting to watch — and can give an investor a fair choice, Ashwin Patil, Senior Research Analyst at LKP securities, said.

“We continue to see high growth opportunities in segment PV, EV and JLR, particularly in the areas of EVs, autonomous vehicles, and vehicle software which this move will help secure high focus. We think this demerger will help Tata Motors to better capitalise on growth opportunities and enhance value for long-term shareholders,” Prashanth Tapse, Senior VP (Research), Mehta Equities Ltd, said.