Post on 16th Feb 2017 by Pradeep Jain, Director, Paperpink.
This post is related to investment/Trading opportunity in Tata Motors Ordinary Shares and DVR as on 16th Feb 2017.
What is DVR?
DVR means shares having differential voting rights. These shares carry lower Voting rights and higher dividend rights e.g. In Tata Motors DVR, every 10 shares has 1 voting right. This is compensated by additional 5% dividend to DVR holders as compared to ordinary shareholders.
DVR is normally issued to raise money while avoiding risk of hostile takeover.
Historical Corporate Action in Tata Motors DVR
Following corporate action has been occurred in Tata Motors DVR since its listing.
Historic Price Movement and Discount Trent
We have captured above the historical discount trend and price movement of Tata Motors DVR. This shows that discount moved in the range of 20% to 56% in last 3 years and as on today it is at highest level of last 18 months i.e. 39%. Green circles in the charts are impact of points mentioned in the general discussion below.
1 In 2008, when TM DVR was originally offered, the discount in DVR as compared to Ordinary was at a reasonable level of 10%. But over a period of time, this discount kept widening until it reached around 56% in August 2013.
2 This Huge discount seems to be against common sense. That is because both DVRs and ordinary shares are based on the same business. Only difference is of the voting rights and that anyways has been compensated for by a higher dividend promise to DVR holders. Ideally, this discount should not be so large.
3 Global average of discount in DVR is around 15%-20% and in developed market like USA it is as low as 5%. Liquidity & involvement of traders in DVR also play a vital role in discount %.
4 In last week of June 2014, a UK based fund house Knight Assets came out with a recommendation for Tata Motors. It advised the company to list its (planned) new DVR shares on New York Stock Exchange but it asked Tata Motors to add the words ‘Jaguar Land Rover’ to the name of the DVR before listing. This according to fund would help it correct the big discount which DVR trades at and bring it in line with global averages of 10-15%. And since US markets are more familiar with JLR brands and with the dual-class shares, it would help listing the DVR in US markets. However, it did not happen. (Check the Impact of the same in discount trend as depicted in chart above)
5 TATA Motor DVR Included in MSCI Index on 13th Nov 2015. This envisages the increase in liquidity and global exposure to the DVR which may reduce the discount heavily. It helped in reducing discount to a large extent but eventually its again widened. (Check Chart above to see the impact)
6 TATA Motor DVR Included in Nifty50 on 23th Feb2016. Traders involvement increased in the DVR after inclusion of the same in Nifty50. It also helped in reducing discount, (Check Chart above to see the impact)
7 Many market participants now believe that this discount will settle at levels of 10%-15%. But we must remember that this discount is highly volatile. However, if we are taking position or playing the discount part at higher discount %, we may earn decent profits.
8 The last traded price for TTM as on 15th Feb 2017 was Rs 437 and that for DVR was Rs 268. Now simple calculation tells that for gaining ‘a’ vote in Tata Motors’ voting, you will have to shell out Rs 169 extra (437-268). I personally don’t think this makes sense for small investors. It might make some sense, if you have substantial stake in Tata Motors and want to affect company’s decision making. But since you are reading this post on my blog as a trader, I assume you don’t have very big stake in Tata Motors.
9 I agree that it’s very important to exercise voting rights if the company is not being managed properly or its taking certain decisions which are not in best interest of minority shareholders. But broadly speaking, Tata Motors is managed decently if not brilliantly. And hence a small investor should not worry too much about his voting rights and prefer DVRs as long term bets (if convinced about Tata Motors business) as compare to ordinary shares. At current market price of DVR, we are getting the same business at 40% discount with assured higher dividends as compared to Ordinary shares.
Sell same amount of Tata motor Future and buy same amount of Tata motor DVR Future. This will involve margin for both Ordinary shares and DVR Shares.
- Sell Tata Motor Future worth INR 50 Lacs and Buy Tata Motor DVR worth INR 50 Lacs.
- Brokerage and expenses at the rate of 0.04% to execute and close this transaction will be INR 8000 p.m. and if we assume that we have to carry this transaction for a year, then annual cost will be INR 96000/-.
- If we assume margin of 15% than total margin or Investment on above transaction will be INR 15 Lacs.
- If we get 5%-10% reduction in discount at any time during the year then we will earn INR 2.5 Lacs to INR 5Lacs. If we move towards global rate of discount from here due to inclusion of DVR in MSCI and Nifty 50, it could fetch a surprising rate of return.
- We have position in the abovementioned strategy which may result in the biased view.
- We are not valuing DVR here. We are just discussing the discount at which DVR shares are available. It is very much possible that ordinary shares are over-valued and consequently, DVR may themselves be overvalued.
- Investors shall assess their own risk before executing any transaction as per the above strategy.
- If discount gets further widened, loss may be incurred.