Will Tata Motors' demerger unlock value for shareholders?

Tata Motors shares rallied more than 7% intraday to hit a fresh 52-week high of ₹1,065.60 apiece, a day after the company announced plans to demerge its passenger and commercial vehicles businesses into two separate listed companies.

The auto stock witnessed heavy trading activity as more than 2.88 crore shares changed hands in deals worth ₹2,994 crore. The market capitalisation of the company rose to ₹3.51 lakh crore. Stock trades with 4.1% gains as of 12:30 pm.

Tata Motors, after market hours on Monday announced that its board has approved a proposal to demerge the company into two separate listed entities. While one entity will house Passenger Vehicle, Electric Vehicle, Jaguar Land Rover and related investments, another entity will comprise commercial vehicle business and related investments.

Value unlocking and better synergies

As per experts, the value unlocking opportunity from the demerger of two businesses fuelled buying in shares of Tata Motors. The demerger of the passenger vehicle segment reflects the company’s confidence in running the PV business successfully as a separate entity, which would be value accretive.

Furthermore, the company said the separation of the two businesses will result in better synergies across its PV, EV and Jaguar Land Rover (JLR) business particularly in the areas of EVs, autonomous vehicles, and vehicle software.

In February, Tata Motors surpassed rival Hyundai Motor India to clinch the second spot in terms of a number of PVs sold in domestic markets. Tata Motors’ total domestic PV sales rose 20% YoY to 51,267 units compared to 50,201 units sold by Hyundai Motor India in February 2024.

The company will seek the necessary approval of regulators, creditors and shareholders for this demerger which could take a further 12-15 months to complete, while a scheme of arrangement for shareholders will be announced in the coming months.

Conclusion

The rise in the Tata Motors shares suggests that investors and shareholders have given thumbs up to the announcement as demerger might lead to better price discovery. Further, experts believe both businesses can pursue their respective strategies with greater freedom in the medium term.