1.Tata Motors share price target : PV or CV, which biz may create more value?

Tata Motors price

By FY25–26, Tata Motors could be trying to move up to the second position in India’s PV market. According to recent sources reported by Nomura, Hyundai Motor India may be considering an initial public offering (IPO) in India.

The demerger of Tata Motors Ltd. (TTMT) into the commercial vehicle (CV) and passenger vehicle (PV) divisions may not immediately alter the Street’s valuation methodology, according to Nomura India on Tuesday. This is because, according to the report, India’s CVs, JLRs, and PVs are well-managed and have appropriate disclosures. and Tata Motors share price target

But in the middle run, Nomura thinks the companies ought to have more flexibility to follow their individual plans. 

We think that Tata Motors' PV business, in particular, has greater potential to generate value in the next years. Following 2020, the company's PV division saw a stunning comeback, with market share rising from the mid-single digits to 13.5% as of 9MFY24. We believe that this has been fueled by its emphasis on safety, stylish designs, and feature-rich automobiles. According to Nomura India, "We had previously anticipated that TTMT might have two models among the top 3 SUVs in India."

According to the international brokerage, Tata Motors may want to rank second in India’s PV market by FY25–26F. Although Hyundai does have far larger margins, it was mentioned that Hyundai Motor India was looking into a possible IPO in India at a valuation of $22-28 billion. For the time being, Nomura India maintained its target price of Rs 1,057 for Tata Motors.

With a 70%+ market share at the moment and plans to add 10 EV models to its lineup by FY26, Tata Motors is leading the charge in efforts to promote the adoption of EVs in India. By 2030, it also hopes to have 50% of its volumes come from EVs. The firm may create significant value if TTMT’s approach is effective, according to Nomura India.

Although the Ebitda margins for Tata Motors’ PV business are just 6.5%, in Q3FY24, the ICE margins had already increased to 9.4%. The total margin has decreased as a result of the negative EV margins (negative 8.2% in Q3).

We anticipate that as product development expenses account for the majority of losses, EV margins will gradually increase. Future re-ratings for the CV company may come from its increasing market share and profitability. Success in e-Buses and e-LCVs may provide benefits that we are presently unable to quantify, according to Nomura India.

The NCLT scheme of organization would be used to carry out the demerger, and all current Tata Motors shareholders would have the same number of shares in each of the two listed companies.
After the subsidarization of PV and EV industry earlier in 2022, the demerger can be seen as the next natural step.
The management anticipates a convergence of synergies between PV, EVs, and JLR, especially in the domains of EVs, driverless cars, and vehicle software. It said that the authorized demerger will improve employee growth opportunities, improve customer experience, and increase shareholder value, among other things.

The official business filing states that in the upcoming months, the TTMT Board of Directors would consider and approve the NCLT scheme of arrangement for the demerger, subject to receiving all required approvals from creditors, shareholders, and regulatory bodies. It should take between 12 and 15 months to finish.

2.Tata Motors demerger: Will the Tata group stock exit Sensex, Nifty? Impact on MSCI, FTSE flows

Will the Tata group stock exit Sensex

Tata Motors demerger: Nuvama cited the separation of Jio Financial Services Ltd
(JFS) from Reliance Industries Ltd (RIL) as an example.
Jio Financial was listed separately,
however after a few days it was taken out of the domestic indices.When it comes to anticipated passive flows from Sensex or Nifty, Nuvama Institutional Equities noted that the demerger of Tata Motors into two distinct firms is a non-event initially. Tata Motors will leave Nifty and Sensex when the demerger is finished and the smaller corporation (the CV business) becomes a separate firm. At the moment, Tata Motors is a member of all passive indexes. According to Nuvama, the transfer will become reality in around 15 months.

https://www.google.com/finance/

Jio Financial Services Ltd. (JFS), which separated from Reliance Industries Ltd. (RIL), was used as an example. Jio Financial was first listed independently, but over the course of the following several days, it was taken off of the domestic indices.
“Tata Motors (TTMT) is smartly taking use of its present momentum to set itself up for success in restructuring. Tata Motors made a significant statement on the demerger of its passenger vehicle (PV) and commercial vehicle (CV) businesses today, after the closing of the Indian market. We’re targeting this move at Nuvama Alternative & Quantitative Desk, and we estimate it will be finished over the next 12 to 15 months,” Nuvama stated

For global indexes like the FTSE and MSCI, eligibility would be determined by the index aggregators based on the market capitalization of the smaller firm at the time of listing.

We think CV should stay in the passive indexes, assuming it receives about 25% of the overall market capitalization. The worldwide cutoff levels and the market capitalization (total and free float) of Tata Motors shares would be the crucial variables, according to Nuvama.

Additionally, Nuvama mentioned the July 2023 announcement of the DVR merger process with ordinary shares and stated that the demerger process will align with the DVR (Differential Voting Rights) merger with Tata Motors (Ordinary shares). It anticipates that the procedure will be finished in six to eight months.

“Not really handsome, but definitely able to establish a position As of right now, the difference between DVR and TTMT is around 5.3% (DVR Cash and TTMT Futures). Furthermore, TTMT benefits from a short roll cost advantage of 40–50 bps monthly (conservative calculation). When this benefit is taken into account, the spread comes to around 8.5% (5.3 percent spread + (40 bps roll cost advantage/month)*8 months). This corresponds to a monthly spread of around 1.05–1.1%, supposing an 8-month completion period,” it stated.

https://en.wikipedia.org/wiki/Share_(finance)

With this spread, the DVR spread contraction trade may be started. Start with 25% to 30% of the position size, and increase it if the spread expands more in the near future.

“We anticipate that the share merger will go well. The possibility of TTMT’s roll cost contracting significantly close to completion poses a risk and might result in a reduction in spread realization. To reduce this risk, we have, nonetheless, included in a cautious 40 bps roll cost from the beginning,” the statement read.

Limited synergies exist between CV and PV, according to Nuvama, but there are many potential synergies among PV, EVs, and JLR, especially in the areas of EVs, autonomous vehicles, and vehicle software, which the demerger will make possible.

“Under its different CEOs, CV, PV (PV+EV), and JLR have all functioned independently in recent years. As the demerger follows the logical subsidiary of PV and EV companies launched in 2022, sentiment is still optimistic,” the statement read.

3.Tata Motors demerger: Should you buy Tata group stock?

Tata Motors management is certain that by increasing focus and agility, this demerger would enable the business to better capitalize on the prospects offered by the individual segments/companies.

The division of Tata Motors Ltd. into two distinct listed companies, PV, which includes India PV, EV, JLR, and associated assets, and CV and its connected investments, may improve attention to their individual industries. This appears to be a natural next step after the CEOs of CV and India PV started presenting their individual financials separately in 2021.

According to Emkay Global, the move demonstrates management’s faith in the two companies’ ability to run separately and generate enough cash flow to sustain itself.

“While we do not envisage major fundamental changes (as both businesses were run independently), we upward revise our SOTP-based target marginally to Rs 950 from Rs 925 earlier) as we factor in 10 per cent premium multiple to Tata Motors CV business (vs Ashok Leyland IN) for potential pure-play optionality on CVs with higher scale,” stated Emkay Global.

Nonetheless, the firm reduced Tata Motors’ recommendation to “REDUCE,” noting that the company’s recent surge had limited upside.
Tata Motors is simplifying its organization and capital structure, according to Kumar Rakesh, Analyst-IT & Auto at BNP Paribas. This began with the delisting of American Depository Shares, which was followed by plans to delist Differential Voting Rights, and is now being announced as a separate listing for the Passenger Vehicle (PV) and Commercial Vehicle (CV) businesses.

We assign a share value of Rs 336 to the CV business and Rs 583 to the PV business. In order to ascertain the share ratios for the combined companies, the board will probably form a valuation committee in the upcoming months. The Tata Motors Board has expressed great confidence in the company’s capacity to turn around its PV and JLR businesses and maintain sustainability. According to Rakesh, “We believe that JLR’s transformation into a contemporary luxury brand offers upside potential to our margin and FCF expectations.”

Tata Motors is currently selling at an appealing FY25E FCF yield, the highest in Rakesh’s coverage, notwithstanding the recent re-rating. His top choice for the sector is Tata Motors.

According to Ashwin Patil, Senior Research Analyst at LKP Securities, the PV industry can now directly fight with the market leader Maruti Suzuki India thanks to JLR’s worldwide arsenal and close the valuation gap.

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