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On March 4, 2024, Tata Motors, India's largest automaker by market cap, announced its plans to demerge into two separate entities. Under the stated demerger scheme, one of the demerged companies will house the commercial vehicle business and its related investments. The other entity will comprise the passenger vehicles business, including electric vehicles, Jaguar Land Rover and related investments. The management has not provided any specific timeline for its demerger plans. In addition, it has not commented on which entity will house Tata Technologies (recently listed) and Freight Tiger (recent acquisition in October 2023).
The market has reacted positively to this news as the stock hit a 52-week high post the announcement.
The rationale behind the demerger
Historically, Tata Motors' passenger vehicle segment has been its primary growth driver. The trend is also visible in the company's recent financial performance. In the twelve months ending December 2023, revenue and profit after tax grew by 33 and 563 per cent YoY, respectively. The passenger vehicle segment has contributed around 81 per cent to the overall revenue in this period. Apart from the disparity in contribution, the management believes there are limited operational synergies between the two segments.
Hence, the company aims to focus on each entity independently to unlock value and capitalise on emerging opportunities, especially in the EV and vehicle software space.
N Chandrasekaran, Chairman of Tata Sons, stated the following about the demerger, "Tata Motors has scripted a strong turnaround in the last few years. The three automotive business units are now operating independently and delivering consistent performance. This demerger will help them better capitalise on the opportunities provided by the market by enhancing their focus and agility. This will lead to a superior experience for our customers, better growth prospects for our employees and enhanced value for our shareholders".
What the demerger means for the shareholders
Shareholders for Tata Motors will have identical shareholding in the demerged entities. Simply put, for each share held in Tata Motors, you will receive one share in each of the new entities.
Also read: Conglomerate discount and demerger
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