Nomura India stated on Tuesday that the division of Tata Motors Ltd (TTMT) into commercial vehicle (CV) and passenger vehicle (PV) segments is unlikely to prompt an immediate shift in the Street’s valuation approach. This is attributed to the well-managed and transparent operations of India CVs, JLR, and PVs.

Nonetheless, Nomura anticipates that in the medium term, the separated businesses will have increased freedom to pursue their respective strategies. The firm is particularly optimistic about the potential value creation within Tata Motors' PV business over the next few years. Since 2020, the PV business has experienced a noteworthy turnaround, with market share rising from mid-single digits to 13.5% as of 9MFY24. Nomura attributes this success to the company's emphasis on safety, appealing design, and feature-rich vehicles.

Nomura India previously expected TTMT to potentially secure two models among the top 3 SUVs in India. The brokerage suggests that Tata Motors may be targeting the position of the second-largest PV player in India by FY25-26F. Despite Hyundai Motor India's potential IPO valuation of $22-28 billion, Nomura acknowledges that Hyundai enjoys higher margins. As of now, Nomura India maintains an unchanged target price of Rs 1,057 for Tata Motors.

Nomura highlights Tata Motors' leading role in driving electric vehicle (EV) penetration in India, holding over 70% market share and planning to expand its EV portfolio to 10 models by FY26. The company aspires to derive 50% of its volumes from EVs by 2030, and if successful, Nomura believes this could lead to significant value creation.

While Tata Motors' PV business Ebitda margins stand at 6.5%, ICE margins have already improved to 9.4% in Q3FY24. Negative EV margins (negative 8.2% in Q3) have impacted the overall margin. Nomura expects that EV margins will improve over time, attributing most losses to product development costs. The CV business could also see re-rating due to improving market share and profitability, with potential upside from success in e-Buses and e-LCVs.

The demerger will be executed through the NCLT scheme of arrangement, ensuring identical shareholding for existing Tata Motors shareholders in both listed entities. Following the subsidization of PV and EV business in 2022, the demerger is seen as the next logical step. The management anticipates synergies across PV, EV, and JLR, particularly in areas such as EVs, autonomous vehicles, and vehicle software. The approved demerger is expected to bring various benefits, including an enhanced customer experience, improved growth prospects for employees, and increased value for shareholders. The NCLT scheme will undergo approval processes, and the entire demerger process is anticipated to take 12-15 months.