"Tata Motors' Strategic Demerger: Paving the Way for a Transformative Future in India's Automotive Landscape"

Title: "Tata Motors' Strategic Demerger: Paving the Way for a Transformative Future in India's Automotive Landscape"

In a strategic move set to reshape the automotive landscape, Tata Motors is poised to undergo a significant transformation through a demerger, meticulously delineating its operations into distinct commercial vehicle (CV) and passenger vehicle (PV) businesses. The unfolding narrative, analyzed by financial experts at Nomura India, suggests that while the immediate impact on market valuation may be subtle, the demarcation could offer newfound autonomy for each business to pursue its unique strategies in the medium term.

Nomura's optimistic stance is particularly pronounced for Tata Motors' PV business, recognizing its latent potential for value creation in the years ahead. The PV segment has witnessed a commendable resurgence, with market share soaring from mid-single digits to an impressive 13.5% as of the third quarter of FY24. This resurgence is attributed to a strategic emphasis on safety, compelling design, and feature-rich vehicles. Nomura envisions Tata Motors eyeing the coveted position of the second-largest PV player in India by the fiscal year 2025-26.

Surprisingly, despite the impending demerger, Nomura maintains an unchanged target price of Rs 1,057 for Tata Motors. The company, however, is not just focusing on the present; it is actively championing the cause of electric vehicle (EV) penetration in India. With a commanding 70% market share, Tata Motors plans to introduce 10 EV models to its portfolio by FY26. Further, the ambitious target of deriving 50% of its volumes from EVs by 2030 has the potential to create a seismic shift in the company's value proposition.

Delving into financial metrics, while the Ebitda margins of Tata Motors' PV business currently stand at 6.5%, there is evident improvement in internal combustion engine (ICE) margins, reaching 9.4% in Q3FY24. Despite the dampening effect of negative EV margins (-8.2% in Q3) on overall margins, Nomura anticipates a gradual enhancement in EV margins over time. Additionally, the commercial vehicle business could experience a re-rating, fueled by an uptick in market share and profitability, with potential upside from successful ventures in electric buses (e-Buses) and electric light commercial vehicles (e-LCVs).

The intricate demerger process is slated to be implemented through the National Company Law Tribunal (NCLT) scheme of arrangement, ensuring that all existing Tata Motors shareholders will hold identical shareholding in both listed entities. A nuanced journey, expected to span 12-15 months, this demerger marks a logical progression following the subsidarization of the PV and EV business in 2022. Tata Motors' visionary management anticipates synergies across PV, EV, and JLR, especially in areas such as EVs, autonomous vehicles, and vehicle software. The approved demerger seeks to provide a superior customer experience, better growth prospects for employees, and enhanced value for shareholders, signifying a pivotal chapter in Tata Motors' strategic evolution

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