Tata Motors shares hit fresh all-time high on demerger plan

Shares of Tata Motors rose over 4% to hit fresh all-time high in opening trade on Tuesday after the auto major unveiled its plan to split the commercial vehicle (CV) and passenger vehicle (PV) businesses in two separate listed entities. The company plans to list commercial vehicles business and its related investments as one entity and the passenger vehicles businesses including electric vehicles (EV), British arm Jaguar Land Rover (JLR), and its related investments as another entity.

Reacting to the demerger plan, shares of Tata Motors gained as much as 4.5% to scale a new peak of ₹1,031.70 in the opening trade. The auto heavyweight breached its previous high of ₹995 touched in intraday trade yesterday. The counter witnessed a surge in buying as more than 4 lakh shares changed hands over the counter in opening deals, while the market capitalisation surged to ₹3.42 lakh crore.

Tata Motors has been one of the best performing largecap stocks, which has delivered 157% returns in the last one year, rebounding sharply from its 52-week low of ₹400.4 touched on March 28, 2023. In the last six months, the auto major has risen 68%, while it added over 30% in the calendar year 2024.

The demerger decision has received mixed response from analysts, with some saying that the decision could unlock value for shareholders. On the other hand, some analysts believe that demerge may not result in any immediate change in the Street’s valuation approach. 

Foreign brokerage Morgan Stanley has assigned an 'overweight' call on Tata Motors after it announced its demerger plan, saying that the decision reflects the company’s confidence in the PV segment and shows that it could lead to better value creation for the auto major. The brokerage has assigned a target price of ₹1,013, up 2.5% from Monday’s closing price of ₹988 per share.

Meanwhile, UBS has maintained a sell rating on the stock with a price target of ₹600 apiece, while Motilal Oswal has downgraded Tata Motors to 'Neutral' from 'Buy' with an unchanged target of ₹1,000 per share. Nomura India has also assigned an unchanged price target of ₹1,057 on Tata Motors. 

While Motilal Oswal said that there is limited upside potential after the recent sharp run-up in the stock, Nomura India believed that the demerger may not lead to any immediate change in the Street’s valuation approach. UBS in its report says that the move will simplify the structure, but it will not have any material impact at present.

Tata Motors in an exchange filing last evening said that the demerger is a logical progression of the subsidiarisation of PV and EV businesses done earlier in 2022 and will further empower the respective businesses to pursue their respective strategies to deliver higher growths with greater agility while reinforcing accountability. 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, it added.

“Tata Motors has scripted a strong turnaround in the last few years. 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. This will lead to a superior experience for our customers, better growth prospects for our employees and, enhanced value for our shareholders,” says Chairman N Chandrasekaran.

Since 2021, the CV, passenger vehicles (PV+EV), and JLR businesses of Tata Motors have been operating independently under their respective CEOs.

As per the company, the demerger will be implemented through an NCLT scheme of arrangement and all shareholders of Tata Motors will continue to have identical shareholding in both the listed entities.

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