Shares of Tata Motors down 4% today: What's the reason?
What's the story
Shares of Tata Motors fell by as much as 3.7% today on the Bombay Stock Exchange (BSE), amid market apprehensions over its proposed $4.5 billion acquisition of Italian truck maker Iveco. The boards of Iveco and Tata Motors are expected to meet today to approve the deal. The acquisition is part of Tata's strategy to expand its global presence in the commercial vehicle sector.
Investor concerns
Investors wary about deal's scale
Despite the strategic move, investors have been wary about the scale of the deal, potential integration challenges, and future profitability of Iveco. Tata Motors plans to buy 100% of Iveco's non-defense business from Exor, an investment firm owned by the Agnelli family. The deal will be executed through a Dutch special-purpose vehicle. This would be Tata Group's second-largest global acquisition after Tata Steel's $12.1 billion Corus purchase in 2007.
Business
Iveco's defense division will not be acquired
To note, the defense unit, which contributes about 13% of Iveco's earnings before interest and taxes (EBIT), will not be part of this acquisition. The company had earlier announced plans to spin off or sell this division by the end of 2025.
Financial implications
Analysts flag margin pressure
Analysts have flagged margin pressure and execution risk as major concerns with this acquisition. Iveco's commercial vehicle margins are around 5.6%, while EBIT margin of Tata Motors is at 9.1%. Although a successful acquisition could nearly triple Tata's commercial vehicle revenue from ₹75,000 crore to over ₹2 lakh crore, it may dilute overall profitability due to the difference in market performance between the two companies.