Tata Motors Stock Check: How does the demerger impact its fundamental and technical outlook for long term?

Earlier this week auto major Tata Motors crossed the ₹1,000 mark for the first time ever after it announced a demerger of its commercial and passenger vehicle segments into two distinct listed entities. This move aims to enhance the company's ability to capitalise on growth opportunities effectively.

On Monday, the company approved a demerger proposal, splitting it into two distinct listed entities. The first entity will encompass the Commercial Vehicles business and its associated investments, while the second will include the Passenger Vehicles segment, consisting of PV, EV, JLR, and their related investments.

In recent years, Tata Motors has witnessed robust performance across its Commercial Vehicles (CV), Passenger Vehicles (PV+EV), and Jaguar Land Rover (JLR) businesses, attributed to the effective execution of individual strategies. As per the company's exchange filing, since 2021, these businesses have been operating autonomously under their respective CEOs. Tata Motors has announced plans to demerge these entities, facilitated by an NCLT scheme of arrangement. Importantly, shareholders of Tata Motors will retain an identical shareholding in both listed entities following the demerger process.

Read here: Tata Motors share price skyrockets 8% on demerger plan, crosses ₹1,000 for first time

Does this demerger decision change the fundamental and technical outlook for the stock in the long term? Is it still a good buy? Here's what experts say.

Stock Price Trend

Tata Motors has been giving robust multibagger returns in the last one year, driven by significant improvements in its Jaguar and Land Rover segments, along with its commercial vehicle division. After seven quarters of losses, the company transitioned to a net profit in Q3FY23, maintaining this trend in subsequent quarters, leading to a remarkable surge in its stock price.

The stock has surged over 132 percent in the last one year and over 30 percent in 2024 YTD. In comparison, the benchmark Nifty Auto has advanced 64 percent in the last 1 year and almost 14 percent in 2024 YTD.

The stock has added over 7 percent in March so far, extending gains for the fifth straight month since November 2023. Between November 2023 and March 2024, the stock has jumped 62 percent.

It has gained 7.4 percent in February 2024 and 13.4 percent in January 2024. Meanwhile, it rose 10.4 percent in December 2023 and 12.4 percent in November 2023.

Read here: Tata Motors demerger: Will shareholders witness value unlocking?

Currently trading at ₹1,017.65, the stock hit its record high of ₹1,065.60 on March 5, 2024. It has now soared 154 percent from its 52-week low of ₹400.40, hit on March 28, 2023.

Earnings

In the quarter ended December 2023, Tata Motors, India's most valuable carmaker, beat Street estimates as it reported a more than two-fold increase in net profit driven by strong sales in its British luxury car unit, Jaguar Land Rover (JLR). Tata Motors’ consolidated net profit surged 137.5 percent to ₹7,025.11 crore in Q3FY24, compared to ₹2,958 crore in the year-ago period.

Its total revenue from operations in the third quarter of FY24 rose 25 percent to ₹1,10,577 crore from ₹88,488.59 crore, YoY, led by JLR sales which rose 27 percent in the period.

On the operating front, the auto major's earnings before interest, taxes, depreciation, and amortization (EBITDA) during the December quarter rose 59 percent to ₹15,333 crore from ₹9,644 crore in the year-ago period.

Read here: Tata Motors sales rise 8% to 86,406 units in February; PV sales up 19% YoY

February Sales

Tata Motors reported an 8.4 percent rise in its total wholesales to 86,406 units in February as compared with 79,705 units in the same month last year. The automobile major’s total domestic sales stood at 84,834 units last month as against 78,006 units last month, a growth of 9 percent.

Tata Motors’ passenger vehicles (PV) sales, including electric vehicles, in the domestic market, were at 51,321 units as compared to 43,140 units in the year-ago month, up 19 percent, the company said in a regulatory filing. Meanwhile, its total commercial vehicle sales fell 4 percent last month to 35,085 units from 36,565 units, YoY.

Technical View

Om Mehra, Technical Analyst, SAMCO Securities

Tata Motors has demonstrated bullish momentum by reaching a historic high of ₹1,065.60 (CMP ₹1018.30), its fifth consecutive month in positive territory.

The stock exhibits strength with solid support at ₹940-950 levels. It remains above the 20-day and 50-day moving averages aligning with a bullish Nifty Auto Index, which is near its all-time high, also taking strength and support from its sectoral Index. Delivery volume surged by 259.07% over the 5-day average. However, the stock might undergo consolidation after a strong ascent.

With each decline, long-term investors could build up their holdings in tranches. Stable investors, usually win the race, as they can prevent themselves from being left behind and, instead, buy the stock when it is at the right levels.

Read here: Nifty 50 vs GDP of India: Why experts see more rally in Indian stock market?

Rohan Shah - Technical Analyst, Religare Broking Ltd

Tata Motors has been in a strong uptrend and has rallied more than 50 percent in the last three months after breaking out from a consolidation pattern range. Following a steady uptrend, the stock is now showing signs of a fading upward momentum, indicated by the formation of a high wave candlestick pattern at the peak and bearish divergence in the momentum indicator. Thus we believe, traders should refrain from creating fresh longs at these levels and wait for a dip towards the 980-960 zone. On the flip side, the 1040-1060 is expected to act as a strong resistance zone in the short run

Pravesh Gour, Senior Technical Analyst at Swastika Investmart

The stock is on a classical uptrend, currently hovering at its peak levels. A breakout from a flag formation on the weekly chart, accompanied by significant volume, suggests a strong potential for further gains. With its trading position above key moving averages and a demand zone around 890–900, the overall outlook appears promising.

Immediate resistance lies at 1120, with a potential for further upward movement beyond 1200 in the short term. Conversely, a breach of the 900 level could lead to a test of support around 850. Momentum indicators like the Relative Strength Index (RSI) signal positive momentum, while the Moving Average Convergence Divergence (MACD) indicates a bullish trend, as evidenced by a centerline crossover.

Read here: TVS, Eicher, Bajaj Auto, Tata Motors preferred picks of Jefferies among autos

Fundamental Views

Prabhudas Lilladher

Tata Motors' decision to proceed with the demerger reflects the management's confidence in the robust turnaround of its PV and JLR business units. This confidence is underscored by the contrast to earlier periods when the CV business's cash flow was often redirected to support these units. The strategic demerger of TTMT is poised to significantly influence the company's market positioning and sharpen its operational focus. At its core, the demerger strategy appears to meticulously consider the interests of all stakeholders like shareholders (to have an identical shareholding in both the listed entities), employees, and customers (noted that it will have no adverse impact on employees, customers, and its business partners).

We value TTMT on a SoTP basis where we already value the CV business (at a multiple of 11x EV/EBITDA, similar to AL IN) and PV businesses (ex-JLR) (at a multiple of 10x EV/EBITDA, at a discount to MSIL) separately to reflect their distinct market dynamics. We have a BUY rating on the stock.

Read here: Merger or demerger—what's the better route to unlock value?

Motilal Oswal

Tata Motors (TTMT) has announced the demerger of its business verticals into two separate listed companies. While the demerger seems to be a step in the right direction, we do not foresee any need to revisit our target price, which is already based on SoTP valuation. Moreover, despite factoring in most of the positive triggers in our estimates, we get limited upside given the recent sharp run-up in the stock. We, hence, downgrade TTMT to Neutral (from BUY) with an unchanged TP of INR1,000 per share.

On the back of a strong performance across its key business segments, the stock has significantly outperformed key indices with a 204 percent return in the last 36 months vs a 50 percent return in the Nifty. Although the demerger seems favorable, we see no need to revise our target price, as it is already factored into our valuation.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.