Tata Motors split may drive PVs in top gear
Investors in Tata Motors Ltd (TaMo) seem to concur with the company’s view that two is better than one. The shares closed more than 3% higher on Tuesday following its announcement to split the commercial-vehicles (CV) and passenger-vehicles (PV) businesses into two separate entities. Existing shareholders will receive one share each of both firms.
The split makes sense and timely amid reports that rival Hyundai Motor is considering a $3 billion initial share sale.
Importantly, the financials of TaMo’s both businesses are available separately, allowing a comparison with rivals in the individual segments, and assigning distinct values to each.
At present, investors seeking to purchase only the less cyclical PV business have to also acquire the CV business, as they are under a single entity.
For perspective, Maruti Suzuki India Ltd shares trade at an FY24 estimated EV-Ebitda multiple of nearly 17 times, while Ashok Leyland Ltd’s is at about 11 times. Maruti specializes in passenger cars, whereas Ashok Leyland focuses on commercial vehicles. EV is short for enterprise value. Ebitda stands for earnings before interest, taxes, depreciation and amortization.
This implies that following the TaMo split, there could be increased demand for shares of its PV business potentially resulting in a re-rating. One way to evaluate a fair value of TaMo’s PV business is to assign a value to its CV business and the residual value could be attributed to its PV business.
In FY24, analysts expect the company to clock CV sales of more than 400,000 units, which would be about twice that of Ashok Leyland. While Ashok Leyland’s Ebitda margin is expected to be slightly higher than that of TaMo’s CV business, the absolute Ebitda will be far higher. For instance, according to estimates by Motilal Oswal Financial Services, Tata
Motor’s CV arm is expected to report an Ebitda of ₹8,600 crore compared to the ₹4,374 crore for Ashok Leyland.
The sheer size of TaMo deserves a valuation premium. Assuming a 10% premium to Ashok Leyland, the FY24 EVEbitda multiple of TaMo’s CV business works out to about 12 times, valuing the segment at ₹103,200 crore. Since it is likely to be nearly debt-free, the EV will be equal to its market capitalisation.
THE shares closed over 3% higher post the announcement of split the CV and PV businesses
EXISTING shareholders will receive one share each of both firms
Based on Motilal Oswal’s assumptions, the FY24 estimated Ebitda for the PV business (including JLR’s Ebitda of £4,658 million at the exchange rate of ₹105 per British pound) works out to ₹52,409 crore.
This shows that the market is valuing the company’s PV business at EV-Ebitda of about almost five times. In comparison, Maruti’s EV-Ebitda stands at about 17 times. Sure, this gap is rather wide, but a strict comparison with Maruti is not appropriate, considering that luxury car companies like BMW and Mercedes command lower valuations, which means JLR will be valued accordingly.
The demerger is expected to be completed in 12-15 months. In the interim, TaMo’s investors will remain focused on domestic and JLR sales volume. In FY25, JLR’s volume growth is expected to taper after a strong show this year. In any case, TaMo’s shares have risen by a whopping 140% over the past year, suggesting that investors are seeing the brighter picture clearly.
IN FY24, analysts expect the company to clock CV sales of more than 400,000 units
Deducting this from TaMo’s current market cap of around ₹376,000 crore shows us that the market is currently valuing its PV business, including JLR, at ₹272,800 crore.
Motilal Oswal estimates TaMo’s net debt at the end of the year at ₹20,800 crore. Assuming this pertains to the PV business, the segment’s enterprise value would work out to ₹293,600 crore.
Mark to Market writers do not have positions in the companies they have discussed here