1:2 Stock Split: Tata's 79-Year-Old Company Splitting Into Two; 2 Brokerages Suggest BUY For Rs 1,100-1,200 TP

79-year old, Tata Motors is in focus since it announced the splitting of its business in the ratio of 1:1. That means this Tata Group-backed automobile giant is soon going to be split into two businesses namely the commercial vehicles and its related investments in one entity, and secondly the passenger vehicles business including PV, EV, JLR and their related investments in another entity. Following the deal announcement, Tata Motors saw massive mixed response between brokerages downgrading their stance to neutral, and some maintaining overweight. But 2 brokerages see potential upside in Tata Motors and have recommended target prices in the range of Rs 1,100-Rs 1,200.

Tata Motors Share Price:

Despite mixed responses from brokerages, Tata Motors has already surpassed the target prices of Motilal Oswal, Morgan Stanley, Macquarie, and CLSA among others.

In the trading week from March 4th to March 7th, Tata Motors' share price gained by about 7% on BSE. Last week, on Thursday, the stock price stood at Rs 1,039.35 apiece, up by 2.14% on BSE with a market cap of Rs 3,45,402.16 crore.

Tata Motors Demerger:

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.

On the deal, Chairman N Chandrasekaran said, "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."

Accordingly, 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.

Tata Motors Buy Call:

Sharekhan, Outlook, Target Price On Tata Motors

We stay positive on TML and believe that the upswing in values in its businesses would be driven more by the improvement in fundamentals, while separate listings of the CV business and PV business would offer investors the flexibility in playing the individual segment's growth cycle.

Further, a strategic investor may also find it easy to invest in any of the individual businesses based on their portfolio choices. While the management is aiming for a double-digit EBITDA margin in the PV business and to sustain a double-digit EBITDA margin in CV, it targets a JLR business to be net cash positive by FY25.

In the CV business, the company is continuing to focus on retail sales performance with value-added product offerings, which we believe would help its CV division sustain profitability. Further, the PV business has been gaining a healthy market share backed by its new product launch strategy and we believe that the losses in the electric vehicle business would come down to a gain of scales and a reduction in input costs. An EV battery cell plant within the group would help the company in achieving speedy product validation and reduce dependence on third-party suppliers. While hydrogen fuel cell technology is at a nascent stage, TML has been making efforts to secure its growth prospects in the hydrogen fuel cell space in future.

We maintain a Buy on TML with a revised PT of Rs 1,188 on expecting continued improvement in JLR, PV and CV businesses and reduced net automotive debt.

KR Choksey, Outlook, Target Price On Tata Motors:

TTMT's path towards deleveraging along with increased focus on the separate verticals of CV and PV post the demerger augur well for the long-term performance of the Company.

We value the JLR business at 4.0x EV/EBITDA (3.5x earlier), JLR Chery at 2.4x EV/EBITDA, TML-CV at 14.0x EV/EBITDA (13.0x earlier) and TML-PV at 16x (14.5x earlier) to arrive at an equity value of INR 1,105 adding INR 42 for Tata Technologies and we raise the Target Price to INR 1,178/share (prev: INR 1,060).

Ashwin Patil, Senior Research Analyst at LKP securities:

The announcement of demerger between the two businesses of Tata Motors into CVs and PVs shall split the business value into half and should enable focussed approach and flexibility.Also the synergies are lacking in both the businesses, which explains the move.Their volume performances, margins, drivers, competitors are totally diverse. Therefore it is a smart move from the company, which was always on the anvil since a while now.

From competition point of view, the PV business can now directly compete with the market leader Maruti, with the global ammunition in the form of JLR and bridge the gap on valuation front. With Hyundai's listing on the cards and M&M as the fourth rival, the tussle in the PV space will be interesting to watch and can give an investor a fair choice to select between four of them.

On the CV front, TaMo will compete straightaway with the pure play domestic player Ashok Leyland.

We believe a better cash utilization should add to the positive sentiments. Since its an equal split, we can't take a call on valuations. We stay positive on the stock.

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.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.