Why Tata Motors Eyes Better Valuations For Its Commercial Vehicle Arm

"This is a Rs 80,000-crore business," PB Balaji, the group CFO at Tata Motors, said in his first interaction with NDTV Profit after the demerger announcement earlier this year.

"We're roughly double-digit Ebitda and we'll keep increasing that and then we spend about 2-3% on capex. So, by design it's cash flow positive... It's a (high) return on capital employed (business), seriously strong ROCE (36% last year)."

In March, Tata Motors declared the separation of its commercial and passenger vehicle divisions into two distinct listed entities, aiming to more effectively leverage growth opportunities. The passenger vehicle unit will comprise traditional fuel, or internal combustion engine, electric vehicles and Jaguar Land Rover businesses.

The company will file for the demerger with the National Company Law Tribunal by August and expects it to be completed by July next year.

The company is changing the business mix within the commercial vehicles segment to dramatically reduce volatility of the results coming out of it.

"The heavy commercial vehicle part of the business is intensely cyclical. The intermediate light commercial vehicles are lesser so, small CV even less so, buses even less so," said Balaji, adding that the intention is to reduce volatility of the results coming out of the CV business.

"So that at an overall level between revenue to profit, you need to be much less volatile, much more," he said. "The demerger gives us the opportunity to demonstrate that."

The commercial vehicle division had been subsidising the passenger vehicle operations and with the passenger vehicle segment now cash-generating, the commercial vehicles operations can now focus on its growth and investments, Balaji said.

He also noted that there will be limited synergies between the segments. "Because the way the CAFE norms are evolving, the way technology is evolving, the road map that they have to take is going to be very, very different," he said.

"So, to overload that on to PV overhead is not fair and vice versa. It (PV) is going to be more software-intensive; it's going to be more feature-led, so that's what the PV guys will be focusing on, important to tease that out," he said.

CAFE, or Corporate Average Fuel Economy, norms are imposed to curb total emissions of carbon dioxide. These norms, expected to be enforced from FY27, will force manufacturers to make more efficient—and expensive—cars. More expensive conventional cars will result in greater acceptance of electric vehicles, according to Balaji, who said the costs of both vehicles will converge.

Tata Motors’ domestic business is net debt-free and it has guided for an operating margin of 10% for the passenger cars arm. It also aims to ramp up the metric for Jaguar Land Rover unit from 8.5% at present to 15%.

Balaji expects the passenger car business to self-sustain despite the guidance for Rs 16,000-18,000 crore of capex lined up for the domestic electric vehicle business.

"The PV business is cash-flow positive. Because it generates about 10% Ebitda," Balaji said. "It spends about 6% capex. So, about 4% is the free cash flows that it will generate roughly, broadly speaking."

The company has guided for the JLR unit to be debt-free in FY25. The passenger vehicle arm will also receive dividends from JLR, which is pivoting to premium segments with higher margin.