Tata Motors DVR trades at historical discount

The gap between the Tata Motors share prices and its different voting rights (DVR) shares widened to historical levels on Tuesday. The Tata Motors DVR closed at a 46 per cent discount to the company's share price at Rs 983.2 a share.

With the widening gap, the DVR shareholders, who are entitled to a 5 per cent extra dividend from normal shareholders, will now get better returns in the form of dividend yield.

The DVR was trading at such a discount over a year back, in February 2010. On average, the DVR price of Tata Motors has traded at about 32 per cent — 1,400 basis points lower, compared to the current discount of 46 per cent.

Analysts believe the gap will narrow in the coming days, in line with the historical trend. And, it is essentially because of the rise in ordinary share prices.

 “Our base case target price for ordinary Tata Motors shares stands at Rs 1,163 a share. Assuming a 42 per cent discount, the derived target price for the Tata Motors DVR stands at Rs 675, an upside potential of 26.8 per cent,” said Surjit Arora of Prabhudas Liladhar, in a recent report on the company. Currently, the DVR is trading at Rs 532.60.

DVRs mostly trade at a discount, largely due to the fewer voting rights they enjoy. However, at times, the gap between DVRs and ordinary shares is large. This provides a good opportunity to investors. In the case of the Tata Motors DVR, while the voting rights are less, the additional 5 per cent dividend for DVR shares translates into a dividend yield of over 4 per cent, which is considered good.

“Assuming that the current 46 per cent discount continues, the derived value of the DVR would stand at Rs 628, an upside potential of 18 per cent,” added the report.

In terms of valuations too, analysts expect the company to report a consolidated earning per share (EPS) of Rs 142-146 in financial year 2012. Taking these estimates, the DVR is valued 3.5 times its FY12 estimated earnings, which is reasonable considering that ordinary shares at Rs 983 a share are now trading at seven times.

So, compared to ordinary shares, the DVR valuations are half. With the discount at historical lows, it is a good signal and should act as a support for the stock. DVRs are generally held by long-only funds and institutions not interested in voting rights. This is also a reason why analysts believe the recent correction in the Tata Motors DVR was largely on account of institutional selling.  “Looking at the price differential, one should certainly consider it at these prices. The gap will narrow down once the participation of retail and institutional investors increases in the counter. It is possible for it to reach the average gap, which is 30-35 per cent as against the current discount,” said Deven Choksey, MD of KR Choksey.