1:2 Split: ICICI Sec's Recommendation On Tata Company's Plan For Splitting Into Two, Stock Up 140% In 1-Year

Brokerage ICICI Securities is the latest to recommend on Tata Group-backed automobile giant, Tata Motors who is going to be split into two businesses. Tata Motors is a multibagger and has gained by over 140% in a year. 2024 has also been strong so far. ICICI Securities believes that the demerger is going to help investors tackle CV cycle trends while remaining aligned to the developments in domestic PVs/EVs/JLR.

Thus, anticipating CV down cycles, ICICI Securities said, "one can remain invested in JLR/India PVs through the other entity, instead of moving out of the combined entity as a whole and miss out on value creation in the PV segment. On the other side, one can take a contra CV cycle view, in times of CV down cycles and invest in the domestic CV market leader."

In its SoTP-based valuation, the brokerage pointed out that domestic PV+EV as a whole contribute ~25%. Thus, it added, "with greater focus towards domestic PVs in the demerged PV entity, we believe there is scope for a valuation gap between industry leader MSIL's (~16-18x forward EV/EBITDA) multiple and TTMT's India PV business (~12x) to narrow down. Thus, we expect ~5-6% enhancement in valuation of the current entity, and have factored that into our price target."

On the valuation, ICICI Securities note however said, "Despite incremental synergistic benefits of creating a PV entity, with a brand like JLR in its portfolio, we downgrade TTMT as a combined listed entity to REDUCE, going by the valuation levels it is trading at."

"At our SoTPbased TP of INR 901 (~12% downside), implied FY26E EV/EBITDA multiples of India business and JLR would be 13x/2.5x, respectively, implying little room for further re-rating. Post ~40% returns in the past three months, we believe TTMT is presently building in peak of CV cycle, ~10% EBIT margin in JLR ahead and a profitable India PV business, in unison," the brokerage's note said.

On March 11, Tata Motors share price stood at Rs 1,028 apiece, down by 1.09% on BSE with market cap of Rs 3,41,630.27 crore. Tata Motors is the second most valued company of Tata Group in terms of market-cap. In the trading week from March 4th to March 7th, Tata Motors' share price gained by about 7% on BSE.

Tata Motors received approval to be demerged into two separate listed companies housing A) the Commercial Vehicles business and its related investments in one entity and B) the Passenger Vehicles businesses including PV, EV, JLR and its related investments in another entity. The demerger will be implemented through an NCLT scheme of arrangement and all shareholders of TML shall continue to have identical shareholding in both the listed entities.

As per the filing, the demerger is a logical progression of the subsidiarisation of PV and EV businesses done earlier in 2022 and shall further empower the respective businesses to pursue their respective strategies to deliver higher growths with greater agility while reinforcing accountability.

Furthermore, 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.

Part of the $128 billion Tata group, Tata Motors Limited, a USD 42 billion organization, is a leading global automobile manufacturer of cars, utility vehicles, pick-ups, trucks and buses, offering an extensive range of integrated, smart and e-mobility solutions.

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