Tata Motors may drive out of Sensex, Nifty

Tata Motors is likely to exit the S&P BSE Sensex and the Nifty50 indices once the demerger process of its commercial vehicle (CV) and passenger vehicle (PV) businesses is complete, analysts at Nuvama Institutional Equities said.

They have compared the development with Reliance Industries (RIL) and Jio Financial Services, which got listed separately and even­tually (in the next few days) got excluded from the domestic indices.

“Initially, it's a non-event.

"Tata Motors is currently a member in all passive indices.

"However, once the demerger is complete, with the smaller entity (CV business) becoming a standalone entity, it will exit Nifty 50 and Sensex.

"We're looking at a wait of around 15 months or so for this to materialise,” wrote Abhilash Pagaria of Nuvama Institutional Equities.

At the bourses, shares of Tata Motors jumped nearly 5 per cent on the BSE to cross the Rs 1,000 mark and hit a new high during Tuesday's intra-day trade.

The stock rose to a fresh high of Rs 1,031.70 after the company announced the demerger of its business verticals into two separate listed companies on Monday.

In the past year, shares of Tata Motors have been in top gear and have outperformed all stocks that comprise the Nifty Auto index with a rise of nearly 131 per cent during this period, shows ACE Equity data. Bajaj Auto (up 119 per cent) and TVS Motor Company (109 per cent) are the other two stocks that have doubled investor's money during this period.

In comparison, the Nifty Auto index has surged 63 per cent, while the Nifty 50 index has moved up around 27 per cent during this period, showed data.

Tata Motors' stock is also part of global indices such as MSCI and FTSE.

These two indexes, Pagaria said, will evaluate the smaller entity's market capitalisation (mcap) around listing to determine its eligibility to continue remaining part of these indexes.

“Assuming the CV business gets around 25 per cent of the total market capitalisation, we believe it should maintain its position in the passive indices.

"The key factors will be the market cap (total and free float) of Tata Motors shares and the global cutoff levels,” Pagaria said.

DVR shares

That said, the merger of DVR shares, or shares that carry differential voting rights, and ordinary shares of Tata Motors was announced in July 2023-end.

“The merger process of DVR (Differential Voting Rights) with (Ordinary shares) will coincide with the demerger process.

"At Nuvama Alternative, we expect the merger of DVR and Ordinary shares to be completed within 6 to 8 months from now,” Pagaria said.

Most analysts remain bullish on the stock from a long-term perspective.

Those at Nomura, for instance, have maintained a 'buy' rating on the counter with a target price of Rs 1,057 levels, and believe the demerger of Tata Motors into CV and PV businesses may not result in any immediate change in the Street’s valuation approach.

In the medium term, however, the businesses should be able to pursue their respective strategies with greater freedom.

"We maintain ‘Our Buy’ rating with our target EV/Ebitda for JLR at 3x, which benchmarks valuations based on FCF yields of peers (13 per cent/16 per cent for FY25F/26F for JLR on our target valuation).

"We maintain CVs at 10x EV/Ebitda, PVs at 1.5x EV/sales on FY26F sales, and investments at Rs 138/share.

"Further, the re-rating of JLR will depend on the success of its new EV models," wrote Kapil Singh and Siddhartha Bera of Nomura in a recent note.