Value Unlocking Is At The Core Of Tata Motors’ Demerger Plan

The demerger reflects confidence in the mainstay business.

“This (the demerger) signifies the management’s confidence that the two businesses can operate independently with self-sustaining cash flows,” Emkay Global said in a note. 

And while the brokerage does not see any major fundamental changes, it has revised its SOTP-based target price marginally to Rs 950 from Rs 925 earlier, factoring in a 10% premium multiple to the CV business. The recent run-up in the stock price limits upside.

The demerger also plays into Tata Motors’ debt picture.

As of Dec. 31, 2023, Tata Motors had a net automotive debt of Rs 29,200 crore even as the free cash flow has improved—Rs 6,400 crore in Q3 FY24 from Rs 5,300 crore a year ago. At JLR, free cash flow stood at £626 million in Q3 FY24 and £1.4 billion in the nine months to Dec. 31, even as debt almost halved year-on-year to £1.6 billion, according to the company’s third-quarter financials.

“On our net debt journey, I expect Tata Motors’ domestic business to become near net debt zero in FY24 and JLR the following year,” Chandra had said at the car company’s annual general meeting in August last year. 

As of Dec. 31, Tata Motors had a debt-to-equity ratio of 1.58, down from 3.68 a year earlier.

Then there’s the matter of synergies.

According to Tata Motors, the demerger is a natural progression of the “subsidiarisation” in 2022. While there are limited synergies in the CV space, there is considerable overlap in the PV business—for example, JLR’s electrified modular platform Tata Motors’ EV-first models under the ‘Avinya’ brand. The current generation of the Harrier and Safari SUVs is built on an old Land Rover chassis.