Indian automaker Tata Motors, a subsidiary of automotive giant Tata Group, found itself in the headlines lately after its shares seemingly plunged by almost 40%.
The sudden drop shocked investors, who were left wondering what the company did to warrant such a fall from grace in this strong and well regarded company. But the truth behind this huge drop is quite opposite to what it looks.
The 40 percent drop is not a real value loss it is a technical adjustment that has taken place due to the demerger of Tata Motors’ commercial vehicle (CV) segment. Let’s understand this in plain simple English.
What Actually Happened?
Tata Motors has recently successfully demerged its commercial vehicle business from the passenger and electric vehicle business. Simply put, the company has decided to split its commercial vehicles business (trucks and buses) from its cars and electric vehicles business.
This was done to enable two separate listed entities - one in Passenger and EV business and the other in Commercial Vehicles. Post demerger, the stock exchange had to recast the share price of Tata Motors for the split.
“Therefore, investors witnessed a 40 per cent collapse in stock price which is not a real collapse in company value. This is merely an adjustment to reflect the fact that Tata Motors’ entire business is now split between two different companies.
Why did Tata Motors opt for demerger?
Tata Motors is also clocking good numbers in the commercial vehicle as well as passenger vehicle segments. But these two businesses operate quite differently.
- The passenger vehicle and EV segments are fast-paced and ever-evolving, and centered on the customer, driven by innovation and design.
- It has more business in industrial commercial vehicles like trucks and buses and logistics solutions.
With the separation, Tata Motors will be able to focus and lead each business individually. Each company will now have its own strategy, management team and plans for growth.
Such separation enables the companies to grow faster, raise funds easier, and attract investors focused on particular sectors.
Is This 40% Sell-Off a Bad Sign?
Absolutely not. This is not a true crash in the share value of Tata Motors that the 40% is trying to ma ke us believe. It is only a technicalprice adjustment due to the demerger.
Let’s do a quick hypothetical: Pretend you had one big box that was worth ₹100 and in that box were two products. Now divide it up into two boxes — one is now worth ₹60 and another ₹40. The sum-of-the-parts is still 100 rupees, but now it’s broken up into two distinct pieces.
Likewise, the value of Tata Motors is not lost – it is now divided between two companies:
1.Tata Motors (Passenger and EV business)
2.Tata Commercial Vehicles Ltd.
When both firms are listed investors would get to see their combined value and which would be same (or probably more) than before the demerger.
How Does It Impact Current Investors?
If you hold Tata Motors stock, you don’t need to panic. Your investment is safe. You will be allotted shares in both the companies post demerger in a particular ratio (to be notified by the company).
This means you will own part of both the passenger/EV company and the commercial vehicle company. Instead of losing money, you end up owning two separate, growing companies.
In the long run this can be good as both companies can excel in their own niches.
Opinions of Market Experts
Market analysts and financial experts who follow Tata Motors closely say the demerger is a strategic move and long-term positive for investors.
Experts say that
- Passenger and EV segments can garner higher valuation as they have strong growth.
- The commercial vehicle firm will now be able to concentrate more on its core business of growing market share and improving margins.
- The aggregate performance of the two could even attract institutional and foreign investors.
In a nutshell, the stock price may appear too low to right now, but the intrinsic value remains the same.
What Should Investors Doing Now?
1.Do Not Panic: The 40% decline is not a real loss. It’s a technical price adjustment because of the split.
2Hold Your Shares: If you own Tata Motors shares, hold them through the listing of both firms, so that you can more clearly understand the new structure.
3.Wait for Listing Updates: When the demerged entity gets listed on the bourse, you would be able to ascertain the true value of the two stocks.
4.Think Long Term: Tata Motors is a good brand and has a great future in the EV, commercial space. It may be that the demerger unlocks more value in the years to come.
Tata Motors’ Road Ahead After Demerger
Tata Motors has been at the forefront of India’s automobile sector for several years. As electric mobility gains momentum, the company’s EV segment (including Tata Nexon EV, Tiago EV) is witnessing a steep growth.
Its commercial vehicle division continues to be a major force in the truck and logistics sector, particularly as India is pouring substantial funds into infrastructure and transportation.
With the two units being separate entities now, each could:
- Focus on innovation and research.
- Add strategic investors/partners.
- Improve efficiency and profit margins of operations.
Such a step puts Tata Motors in line with global auto trends where major global companies separate their EV and CV units to realize maximum shareholder value.
Key Takeaways
- The 40 percent drop in the Tata Motors share price is not a real crash — just a technical correction post the demerger.
- Investors will receive shares in Tata Motors (EV and passenger) as well as Tata Commercial Vehicles Ltd.
- The demerger is likely to unlock value and provide greater focus to each business.
- Experts said the opportunities for long-term investors in both companies are enormous.
- No need to panic, and it’s really time to get to know the new structure and look for future gains.
Conclusion
The recent plunge in Tata Motors’ share price, down 40%, might seem alarmist but is not the harbinger of doom. Instead, it is the start of a new era for one of India’s most legendary car brands.
The demerger, the company said, will enabled both businesses to focus on their growth independently, garner superior investments and in turn enhance value for the shareholders.
Investors who keep their head and remain patient through the restructurings of the next several months are the most likely to see outsized rewards.
In investing, short-term volatility can obscure long-term opportunity and the Tata Motors demerger could be just that kind of opportunity, rewarding those who focus on the big picture.