Tata Motors Demerger Might Lead To Better Value Discovery, JP Morgan Says

Global brokerage J.P. Morgan said Tata Motors Ltd.’s plan to demerge its business might lead to better value discovery.

The brokerage rates the Indian automaker as Overweight with a target price of 1,000 rupees per share. Its revised bull case target price on the stock is 1,200 rupees, based on certain scenarios.

J.P. Morgan said its new bull case assumes the company’s India commercial vehicles (CV) business trades at 11x EBITDA, passenger vehicles (PV) business trades at 18x EBITDA, and UK-based luxury car unit Jaguar Land Rover (JLR) trades at an 8x P/E, unchanged from the earlier bull case.

“We anticipate better-than-expected margin and FCF (free cash flow) delivery at JLR,” the brokerage said in an investor note. “Global luxury OEMs (original equipment manufacturers) are prioritizing profitability over volumes, which should benefit JLR, as well.”

J.P. Morgan said Tata Motors’ market share in India PVs has been resilient despite competitor launches, while the CV margins have hit double digits and this trend is likely to continue, as the company is focusing on mix and value growth instead of volume market share.

“Furthermore, balance sheet deleveraging should reduce EPS volatility and lead to a potential re-rating,” it noted.

Meanwhile, Nomura said the demerger of Tata Motors into CV and PV businesses may not result in any immediate change in the street’s valuation approach because India CVs, JLR and PVs are being well run and have good disclosures.

“However, in the medium term, the businesses should be able to pursue their respective strategies with greater freedom,” it added.

The brokerage said it believes the PV business has more potential to create value over the next few years.

Nomura maintained Buy rating on Tata Motors with target price of 1,057 rupees.

Shares of Tata Motors closed at 988.90 rupees on the NSE yesterday.

DEMERGER PLAN

Tata Motors’ board on Monday approved a proposal to demerge its businesses into two separate listed companies consisting of CV and PV businesses.

The CV business and its related investments will be grouped under one entity, while the PV businesses -- PV, electric vehicles (EV) as well as JLR and its related investments -- will be housed in another entity.

The demerger will be implemented through a scheme of arrangement and all shareholders of Tata Motors will continue to have an identical shareholding in both the listed entities.

Tata Motors said the National Company Law Tribunal (NCLT) scheme of arrangement for the demerger will be placed before the company’s board for approval in the coming months.

The demerger, which will be subject to regulatory and other necessary approvals, could take a further 12 to 15 months for completion, it added.

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