Buy Tata Motors Ltd For Target Rs.1,000 - Motilal Oswal Financial Services Ltd
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Key highlights of business demerger
* The board has approved the proposal to demerge Tata Motors into two separate listed companies housing: 1) the CV business and its related investments in one entity, and 2) the PV businesses, including PVs, EVs, JLR, and related investments in another entity.
* The demerger will be implemented through an NCLT scheme of arrangement and all shareholders of TTMT shall continue to have identical shareholdings in both listed entities.
* The proposal will be placed before the TTMT board for approval in the coming months and will be subject to necessary approvals, which could take further 12- 15 months to complete.
* This step will certainly help TTMT simplify its business structure.
* While the business demerger seems to be a step in the right direction, we do not foresee any need to revisit our TP, which is already based on SoTP valuation.
Our estimates factor in most of the positive triggers now
* India PV business: We factor in 8.5% volume growth in FY25E/FY26E each after 4.5% growth in FY24E vs. management/industry growth guidance of low single digits in FY25. We also factor in 100bp margin expansion over FY24-26E to 7.8%.
* India CV business: We factor in 6% volume growth in FY25E/FY26E each after 1% volume decline in FY24E vs. management/industry growth guidance of near-term weakness in FY25. We also factor in 100bp margin expansion over FY24-26E to 11.5%.
* JLR: We factor in 7% volume growth in FY25E/FY26E each after 25% volume growth in FY24E, compared to the weakness in global PV demand in key developed markets in 2024. We also factor in 150bp margin expansion over FY24-26E to 17.4%.
* We also expect the consolidated entity to become net cash by FY26E.
Valuation and view
On the back of a strong performance across its key business segments, the stock has significantly outperformed key indices with 204% return in the last 36 months vs. ~50% return in the Nifty. Also, as highlighted above, we have already factored in most of the positive triggers in our estimates. While the business demerger seems to be a step in the right direction, we do not foresee any need to revisit our TP, which is already based on SoTP valuation. Given limited upside after the recent sharp run-up in the stock, we downgrade TTMT to Neutral (from BUY) with an unchanged TP of INR1,000 per share.
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