Tata Motors Downgraded to ‘Neutral’ Amidst Strong Performance and Demerger Plans

Tata Motors Downgraded to 'Neutral' Amidst Demerger Announcement

Tata Motors’ demerger into separate commercial vehicle (CV) and passenger vehicle (PV) businesses has led to varying opinions among brokerage firms.

Tata Motors, one of India’s leading automotive giants, has witnessed a significant surge in its stock performance over the last 36 months, outpacing key market indices by a wide margin. However, despite the positive momentum, analysts are now taking a cautious stance on the stock’s future trajectory.

Motilal Oswal, a prominent brokerage firm, has downgraded Tata Motors from ‘Buy’ to ‘Neutral’, citing limited upside potential following the recent sharp run-up in the stock. While the impending demerger of Tata Motors into separate commercial and passenger vehicle entities is viewed favourably, Motilal Oswal indicates that its target price, already based on the Sum of the Parts (SoTP) valuation, does not necessitate a revision.

According to the brokerage, most of the positive triggers, including the demerger, have been factored into their estimates, leaving little room for further appreciation in the stock price. Despite the optimism surrounding Tata Motors, Motilal Oswal believes that the recent rally has priced in much of the anticipated gains.

Similarly, Nomura India maintains an unchanged price target of Rs 1,057 for Tata Motors, highlighting the potential for the passenger vehicle (PV) business to generate significant value in the coming years. Nomura also suggests that Tata Motors’ commercial vehicle (CV) segment could witness further re-rating driven by improvements in market share and profitability, especially with advancements in electric buses and light commercial vehicles (LCVs).

For Data and Prices:https://www.tatamotors.com/shareprice-and-graphs/

Ashwin Patil, Senior Research Analyst at LKP Securities, emphasizes the competitive landscape in the PV sector, where Tata Motors is poised to challenge market leader Maruti Suzuki India. Additionally, with Hyundai’s potential listing and the presence of Mahindra & Mahindra as key competitors, the PV market is expected to witness intensified competition.

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Regarding the CV segment, Patil notes that Tata Motors will directly compete with domestic player Ashok Leyland, suggesting that better cash utilization could boost investor sentiment.

Emkay Global, while foreseeing no major fundamental changes post-demerger, has marginally revised its SoTP-based price target for Tata Motors to Rs 950. The revision accounts for a 10 per cent premium multiple to Tata Motors’ CV business compared to Ashok Leyland, reflecting potential pure-play optionality on CVs with higher scale.

Furthermore, with the completion of the demerger, Tata Motors’ CV business is expected to exit the Nifty and Sensex indices, according to Nuvama Institutional Equities. This move is anticipated to materialize in approximately 15 months, akin to the demerger of Jio Financial Services Ltd from Reliance Industries Ltd.

As Tata Motors navigates through the demerger process and contends with evolving market dynamics, investors remain attentive to the company’s strategic initiatives and competitive positioning in both the PV and CV segments.

Following Tata Motors’ recent announcement of its demerger into separate commercial vehicle (CV) and passenger vehicle (PV) businesses, brokerage firm Motilal Oswal has downgraded its rating on the company from ‘Buy’ to ‘Neutral’. While the demerger itself is viewed positively, Motilal Oswal suggests that the recent surge in the stock price has already factored in much of the potential benefits.

Maintaining its target price of Rs 1,000 per share, Motilal Oswal asserts that its previous valuation already considered the positive triggers associated with the demerger. The brokerage believes that Tata Motors’ recent robust performance has left limited scope for further upward movement in the near term.

Contrary to Motilal’s cautious stance, other brokerages express a more optimistic outlook. Nomura India, for instance, maintains its target price of Rs 1,057 but expresses confidence in the PV business’s ability to create greater value over the coming years. Nomura also believes that the CV business could witness a future re-rating driven by improvements in market share and profitability.

The demerger, slated for completion by the end of 2024, aims to sharpen focus and unlock value in both the CV and PV segments. While Motilal’s downgrade reflects a prudent approach due to the recent price surge, other brokerages remain bullish on the long-term prospects of both demerged entities.

Investors are advised to consider these divergent perspectives and conduct thorough research before making any investment decisions. As Tata Motors progresses through its demerger process, market dynamics and strategic initiatives will continue to shape the trajectory of both the CV and PV businesses.

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