In a bid to unlock value for its businesses, Tata Motors Limited has decided to demerge its passenger vehicles and commercial vehicles businesses into two separately listed entities. 

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. 

The move is the culmination of a series of decisions by the automaker over the last three years aimed at running the various businesses independently.  For example in 2021, the company did not appoint an overall MD and CEO  after Guenter Butschek stepped down. Instead, the businesses were allowed to run independently under their respective CEOs. Then in 2022, the PV unit was hived off into a separate subsidiary. 

“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,” Tata Motors said in a statement.  

Furthermore, there are limited synergies between commercial vehicles and passenger vehicles businesses so there were no real benefit from keeping them together. Analysts said the demerger could cushion the passenger vehicle business from the cyclical nature of the commercial auto market. The CV industry is expected to end FY24 with a 2-5 per cent growth in volume but in FY25 it may decline by 4-7 per cent, according to rating agency ICRA.

On the other hand there are considerable synergies to be harnessed across the high growth passenger vehicle business including JLR particularly in the areas of EVs, autonomous vehicles, and vehicle software which the demerger will help secure.

As businessline had reported recently the demerger could also pave the way for listing the electric vehicle business on the bourses. Tata Motors has already received ₹7,500 crore from American investment firm TPG Rise Climate for its electric vehicle business pegging Tata Motors Electric Mobility Ltd at $9.1 billion. 

Clearly,  all these businesses will need more capital in the near future and the demerger allows Tata Motors to undertake further stake sale to strategic investors across businesses. 

Strategic move

Dhruv Mudaraddi, Research Analyst, StoxBox said the demerger of Tata Motors into two businesses is a step in the right direction as it offers agility to chase opportunities in their respective segments of PVs and CVs and also makes each business more accountable in terms of their performance. “The company’s PV business will benefit from factors such as higher EV adoption, continued premiumization in the SUV space, richer product mix due to JLR business, higher acceptability of the company’s products in Indian markets and a move towards technologically advanced products, while the CV segment is likely to benefit from greater infrastructure thrust, focus on improving public mobility and a replacement cycle on the horizon.”

The demerger comes at a time when the company has been performing well. Its market capitalisation has nearly doubled to over Rs 3.28 lakh crore in a span of one year.  Riding on a strong performance in its passenger vehicles division, Tata Motors has cornered 14.6 percent of the domestic automobile market while its commercial business has a market share of 38.7 percent. “Tata group is building an entire ecosystem with investments in manufacturing batteries, putting up charging stations and financing vehicles. The demerger sets up Tata Motors to leverage this ecosystem,” said an analyst. 

“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,” said Chairman N Chandrasekaran.

The company stated that the demerger will not impact the manufacturing units because they have already been separated out for commercial and passenger vehicles. “The demerger will have no adverse impact on employees, customers, and our business partners,” Tata Motors said.