Tata Motors DVRs surges 10% after Rakesh Jhunjhunwala's bet

Ace investor Rakesh Jhunjhunwala pruned his exposure to Tata Motors’ ordinary shares, while increasing holdings in shares with differential voting rights (DVR).

The billionaire investor’s holding in Tata Motors DVR rose to 3.93 per cent during the September quarter from 1.97 per cent in the preceding quarter. On the other hand, his holding has declined slightly in Tata Motors ordinary shares to 1.11 per cent to 1.14 per cent for the period under consideration.

Tata Motors DVR surged 10 per cent on Thursday and closed the session at Rs 256 apiece. The ordinary shares rose 4.3 per cent to end at Rs 508. At present, the discount between the DVR and ordinary shares is 50 per cent—in line with the historical average. Analysts expect this discount to narrow to 35 per cent.

A host of good news and a strong business outlook could lead to multiple re-rating for the stock. The spread can again contract back to 35 per cent, said Abhilash Pagaria, assistant vice-president, Edelweiss Alternative Research in a recent note.

The change in Jhunjhunwala’s holdings was seen as a further endorsement of this. Apart from Jhunjhunwala, ICICI Prudential Mutual Fund has also increased its stake in Tata Motors DVR to 17.35 per cent from 15.43 per cent at the end of the June quarter.

Tata Motors’ shares have soared 64 per cent over the past month, buoyed by the automaker’s decision to sell a 15 per cent stake in its electric vehicle (EV) business to private equity major TPG and other investors. The infusion values the EV business at $9.1 billion.

Thanks to this, the DVR too has outperformed over a month with a 67 per cent surge. The DVRs carry lower voting rights (10 DVRs have voting rights of one ordinary share) but offer higher dividends (10-20 per cent extra to compensate for the lower voting rights).

In 2015, the spread between ordinary shares and DVRs had narrowed to below 30 per cent, following the inclusion of Tata Motors DVR in the Nifty50 and Sensex. But the spread widened again after the DVRs were removed from the indices.

“At the current spread, positional players who are bullish on the Tata Motors growth outlook can definitely look to accumulate DVR shares over ordinary shares. As the business growth gains momentum, DVR can outperform ordinary shares over the longer term,” Pagaria added.

But those taking the DVR route should be mindful that liquidity at the counter is low when compared with ordinary shares. Also, DVRs have trading limits, while ordinary shares have no circuit filters as they are part of the Nifty index, as well as traded in the derivatives market.