The announcement of a demerger of the CV (commercial vehicle) and PV (passenger vehicle) business by Tata Motors is not a complete surprise. This is just the culmination of two earlier moves – one, the carving out of a separate vertical for EVs (electric vehicles) in mid-2018 and then, the decision to hive off its domestic PV business into a separate subsidiary (housing the EV vertical) in end-March 2020 just when Covid was shutting down the world. With yesterday’s announcement, the Jaguar Land Rover (JLR) business also comes into the mix for PVs, leaving investors who want to bet purely on domestic economic growth prospects with the CV business. The company’s decision came when Tata Motors was firing on all cylinders, with domestic PV, CV, EV and JLR doing well. Reflecting this, the stock has had a stellar run, more than doubling in the last year. Since the news is not entirely a surprise, the market may have factored this into the stock price to a good extent. While common sense may indicate that the CV business may get assigned a lower multiple than PVs in this vertical demerger, the real value market assigns to each entity may be known only on their listing which may happen a year or more later. At that time, the domestic auto cycle may have peaked out.

PV business

To be sure, the domestic PV business is in good shape today. Thanks to successful launches, including the Nexon and Punch, Tata Motors today has a 12-13 per cent market share in ICE vehicles. This is close on the heels of Hyundai and makes the company the third largest player now (Maruti is the market leader). Flashback to FY20, the company has just 5 per cent volume market share in PVs, having never been able to beat competition from Maruti Suzuki or Hyundai. The company last had a 12-13 per cent share more than a decade ago.

While the EBITDA margins per se for the domestic PV business right now is at just 5-6 per cent, the profitability boost for the entity from JLR, which boasts of early to mid-teen margins currently. Notably, JLR has been free cash flow positive so far this year and is on the road to reducing debt. It targets turning net cash by FY25.

In the PV business, Tata Motors has the first mover advantage on EVs as well, with 12 per cent of its total PVs sold being EVs. It has a 67 per cent market share in EVs in the PV segment and has launches lined up too. It is now pressing the pedal further by moving to higher-end-EVs. Tata Motors has licenced JLR’s latest EV architecture currently under development. Apart from giving access to battery assembly and electric drive units, this also involves sharing manufacturing know-how for a royalty fee. The first models based on this architecture are expected to come out in 2025. 

That said, this carved-out entity could only swim or sink with JLR in the foreseeable future.  

CV business

The CV business currently brings an EBITDA margin of 9-11 per cent. The company has a market share of 37 per cent in overall CV sales and is the market leader. But domestic CVs are i not only about trucks, which can be highly cyclical, but also about e-buses, which are not cyclical. (assuming e-buses continue to be housed under the CV business, as it is currently). And, e-bus is a multi-year growth story, which has been driving multi- bagger returns smallcap stocks such as JBM Auto and Olectra Greentech since the pandemic.

Under different phases of FAME- operational since FY15 - 6,862 electric buses have been sanctioned, with only 3,487 supplied as of end-November 2023. But ambitions are lofty. Under the National Electric Bus Programme rolled out in 2022, India plans to deploy 50,000 e-buses over five years. The interim budget too eased out a major pain point for e-bus manufacturers by announcing a payment security mechanism to address concerns such as delay in payments and lack of visibility for the same by state transport undertakings whose finances are not sound. Compared to JBM and Olectra, Tata Motors is a much bigger player in e-buses. As of December 2023, Tata Motors has about 61 per cent share in total e-bus sales, with the shares of the other two players at 24 and 12 per cent respectively. Notably, peer Ashok Leyland has just begun work on its e-bus plant in Uttar Pradesh, with an initial capacity to produce 2500 e-buses a year.

That said, the vertical demerger throws up questions on how several services such as design, procurement, marketing, research, etc that both entities may share, be split.