Tata Motors’s split could shift its passenger-vehicles business into top gear

The seems to have come at a good time, amid reports that rival Hyundai Motor is exploring a $3 billion initial share sale in the near future. Photo: Bloomberg
The seems to have come at a good time, amid reports that rival Hyundai Motor is exploring a $3 billion initial share sale in the near future. Photo: Bloomberg

Summary

  • A rough calculation shows the market is valuing Tata Motors’s PV business at an EV/Ebitda multiple of about 5 times, far lower than Maruti’s 17 times.

Investors in Tata Motors Ltd (TaMo) appear to agree with the company’s view that two is better than one. Shares of the automaker closed more than 3% higher on Tuesday after it announced its decision to split its commercial-vehicles (CV) and passenger-vehicles (PV) businesses into two separate companies. Existing shareholders will get one share each of both firms.

The split makes sense and seems to have come at a good time, amid reports that rival Hyundai Motor is exploring a $3 billion initial share sale in the near future.

Notably, financials of TaMo’s both businesses are already available separately, allowing a comparison with rivals in the individual segments with distinct values assigned to each. Currently, investors interested in buying only the less cyclical PV business have to buy the CV business, too, as they are under a single entity. For perspective, shares of Maruti Suzuki India Ltd and Ashok Leyland Ltd trade at an FY24 estimated EV/Ebitda multiple of almost 17 times and 11 times, respectively. Maruti makes passenger cars and Ashok Leyland commercial vehicles. This suggests that after TaMo’s split, there is likely to be higher demand for shares of the PV business, leading to a re-rating.

One way to evaluate whether TaMo’s PV business is fetching a fair value is to assign a value to the CV business – the residual value could be attributed to the PV business.

For FY24, analysts expect TaMo 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 is far higher. For instance, based on estimates by Motilal Oswal Financial Services, TaMo’s CV business is expected to report an Ebitda of 8,600 crore versus 4,374 crore for Ashok Leyland.

The sheer size of TaMo deserves a valuation premium. Assuming a 10% premium to Ashok Leyland, the FY24 EV/Ebitda 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 the market capitalisation.

Deducting this from TaMo’s current market capitalisation of almost 376,000 crore shows us that the market is currently valuing that 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 EV would work out to 293,600 crore. 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 pound) works out to 52,409 crore.

This shows that the market is valuing the PV business at EV/Ebitda of about almost 5 times. In comparison, Maruti’s EV/Ebitda is about 17 times. Sure, this gap is rather wide. However, a strict comparison with Maruti isn’t appropriate as luxury car companies such as BMW and Mercedes command a lower valuation, which means JLR may be valued accordingly.

The demerger is likely to take 12-15 months. In the interim, TaMo’s investors will stay focused on domestic and JLR sales volumes. In FY25, JLR’s volume growth is expected to taper after it put up a strong show this year. In any case, TaMo’s shares have risen by a whopping 140% over the past year, suggesting investors are seeing the brighter picture clearly.

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