Demerger signifies management confidence in generating sufficient FCF


Demerger to help in better capitalizing on the respective opportunities with greater accountability

Management believes this demerger will help the company to better capitalize on the opportunities provided by the respective segments/companies by enhancing its focus and agility. This will also lead to a superior experience for customers, better growth prospects, and enhanced value for shareholders. The demerger will be implemented through an NCLT scheme of arrangement and all shareholders of TML shall continue to have identical shareholding in both the listed entities. The NCLT scheme of arrangement for the demerger shall be placed before the Board of Directors for approval in the coming months and will be subject to all necessary shareholder, creditor, and regulatory approvals, which could take 12-15 months to complete.

Demerger signifies management᯳ confidence in generating sufficient FCF to operate independently

We believe this development signifies management᯳ confidence that the two businesses (CVs and PVs) will continue to operate independently with greater agility and self-sustaining cash flows (particularly the PV business). Historically, while the CV business has been generating healthy cash flows, the PV business has witnessed challenges in consistent cash flow generation due to its high spending on product development and the re-building phase in its market positioning.

Upgrade TP, but downgrade to REDUCE on recent run-up and limited upside

While we do not envisage major changes in the fundamentals due to this demerger (as the two businesses were operating largely independently with separate reporting and their respective CEOs), we revise our SOTP-based TP upward to Rs950 (vs. Rs925 earlier) to factor in 10% higher multiple for the CV business to 10x EV/EBITDA vs 9x earlier (~10% premium to pure-play CV player Ashok Leyland) for potentially pure-play on CVs with higher scale and market share gains