Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Charts & Analysis

Chart Of The Day: How far is Tata Motors DVR away from the stock?

In 2008, Tatamotors issued shares with Differential Voting Rights (Symbol: TATAMTRDVR) to shareholders in a rights issues (one DVR for every 6 shares, and also one regular share for every six held). (Read an EQM article on this) The idea was that the DVR would hold only 10% voting rights as the regular share, and would get a 5% higher dividend (that is, if dividend was Rs. 2 per share, DVRs would get Rs. 2.10)

The DVR started off okay, but eventually traded at a discount. Now, the discount is 45% – trading around Rs. 100 as the stock trades at 190 or so, and the “spread” keeps widening:

image

Note that there is no need for “convergence” – for the two prices to come together. The only difference is liquidity and the lower voting rights.

If you’re looking for hte obvious arbitrage – short futures and long the DVR – you may be in for a really long wait if the two prices don’t converge. On the other hand, the dividend yield is nearly double the Tata motors yield just because of the price difference.

But hey, would love your thoughts.

  • Soham Das says:

    1. The best way is to convince the management to buyback its dvr
    2. The other way is to table a motion in front of Bombay HC to be done by mgmt to allow conversion of DVRs to Common Shares (in ratio of voting rights). But this is cumbersome.

  • Arghya says:

    Quite interesting. I had no knowledge about DVR.
    Anyway, I was trying to value it. I could not think of any approach to value this instrument. It can’t be treated as preferred stock as dividend is not guaranteed. Valuation would not be in the same line as of stock as it has low voting rights.
    As far as voting right is concern it should be valued 1/10 th of an ordinary stock.
    But extra dividend should bear some higher valuation. But, how much? After pondering over different approaches, I realized that first thing I need to know is the dividend payout, its growth rate, WACC, cost of equity, cost of it’s preferred-stocks etc. And here I got a bouncer – No dividend payment in last five year!!! Is moneycontrol providing wrong info ???
    If moneycontrol is providing right data, then this instrument at 102.7(as of 19th oct 2011) way too overvalued.
    I am thinking of a price of below 50 in near future. (I might be missing some crucial points).
    Any thoughts/suggestion from anybody?

  • Dev says:

    @Soham Das
    Why would the management buy something which gives them 1/10th voting rights of a normal share (at almost half price)? The management would be better off buying the normal shares.
    I did an analysis of this issue and I think that it would be better for retail investors to go for DVR. The reason being that retail investors generally do not have a say in corporate decisions. Their votes do not make any significant impact on decisions of the management. So it would be better if they could get a DVR at almost half the price and double the dividend yield.
    My TTM-DVR analysis is given at
    http://essentialassociate.wordpress.com/2011/03/20/tata-motors-or-tata-motors-dvr/

  • Soham Das says:

    @Dev,
    This is the same idea I also have, for retail its best to go for DVR as extra voting rights is traded away for extra dividend.
    Having said that, coming to the question, why management should actually buy DVRs and not common stocks there are two reasons:
    1. Buyback is a function of value and not voting rights. If indeed dvrs are cheap, then management should initiate a buyback.
    2 With such a move, it will extinguish some of the outstanding dvrs thus bringing the “cash payout” lower , hence increasing appropriations going ahead

    @Arghya,
    Conventional Valuation techniques are done with the perspective that the marginal investor isnt interested/can’t bring in change to the process of measurement itself. I.e to loan a term from physics- observation wont change measurement.
    Hence, traditional conventional valuation system is so “light” on the recognition of catalysts.
    Having said that, coming to the point of valuation of such dvr, its not as easy as it seems as the valuation will mostly depend upon an investor to investor- the reason depending upon the buying power of an investor. For a person with billion dollar under his management, he would be much better to look for common shares, if the discount is not very heavy in DVRs.
    For retail, the foregone voting rights mean little to him and his cash earnings are important.
    For somewhere in between, my belief is, we have to do this exercise from the opposite direction- how much are we going to buy, given our risk in the portfolio => at this price whats our voting rights, with that voting rights, how much can we actually act as a catalyst, and how much incremental change can we bring in (look at the valuation of Buffett as a “restructurer” by Joe Taussig for example) and then attach that value to the valuation perspective.

    • @Soham, There is no buyback for the DVRs – they are preference shares, so in a way they are perpetual instruments (like equity shares). it is not treated as debt.
      I wouldn’t touch these DVRs unless there is a brilliant trading opportunity – the spread has only widened since the beginning…

  • Soham Das says:

    @Deepak,
    Why can’t shares be bought back and extinguished? DCHL has done it, BRK is doing it, Tatamotors can do it as well. It might be semantic problem.

  • Arghya says:

    @Soham,
    Thanks for your comments.
    So far my understanding about this instrument is as follows
    1) This is not surprising. The issue didn’t attracted investors; TATAs saved this issue by subscribing themselves. So in case of absence of investor’s interest this is inevitable after listing.
    2) But why investors didn’t like it? – 10% voting right is meaningful only to retail investors. Institutional investors would like to have some controlling interest of their investment. So it is very unlikely those institutional investors would be interested in these DVR. This is bound to be undervalued due to lack of demand.
    3) 5% extra dividend is meager at the expense of 90% voting right.
    4) There is no incentive for Tatamotors to decrease the spread.
    A 40% discount could have been an interesting situation if the company is set for liquidation. Hah !!
    So according to me, fair value of this instrument would be = (Book value + some premium for 10% voting right + some premium for extra dividend )
    = 63.05 + 12 ** + 0 (As it has not provided any dividend after March, 2009)
    = 75
    ** Considering stock price premium over book value is attributed to voting right only. So current premium considering stock price at 183= (183-63) = 120.
    So voting right premium is = 12 **
    So I would expect the price of DVR to fall to 75-80 level in near future. Unless tatamotors start paying regular dividend, these DVR doesn’t make sense.
    @Soham
    Yes these DVR shares can be bought back or extinguished (I have read the terms and condition) just like common stocks. But I don’t think management would do that. If they have extra money they would utilize/invest it somewhere else. I don’t see any buyback, especially if they have already disposed off their holdings which they acquired to bail out the initial offerings of these DVRs. (And the link you provided it reads ….. “the promoter are continuously reducing their stake in DVR …)