Tata Motors - DVR

Stock Opportunities
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We are only talking about JLR here as that is the valuation metric being discussed. We all know India business is okay.

Sales is not the only factor that can save it. But promoter can save it and will make sure it never happens. Tata sons will never allow it to go out of business. Worst case, they may sell it.

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If they don’t bail out, they may sell JLR and that may affect valuation. If they bail out and if JLR is able to succeed, then market will reflect that outcome.

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Global investors started dumping 2 years back. Brexit and trumponomics was already hurting business. Domestic market was the only holding point…that again has spiraled negatively for market slowdown. It will stabilize at some point but gains are long shot as of now. Dynamics have to change…nothing is suggesting that things will get better.

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In Second week of October 2019, TCS declares special dividend worth Rs 15,000 crore for its shareholders. Owing to its large holding in TCS, a lion’s share (Rs 10,500 crore) has gone to Tata Sons.

Within two weeks Tata Sons has announced that they will subscribe to equity shares worth Rs 3,025 crore and warrants worth Rs 3,470 crore of Tata Motors.

The issue price of the equity shares and exercise price for the warrants to be converted into equity within 18 months from the date of allotment have been fixed at Rs 150 apiece. The funds will be used to by Tata Motors’ to pare its standalone debt of Rs 20,000 crore.

Post above issue, Tata Sons’ stake in Tata Motors will increase to 44% from the current 35%.

Let us see how it is win-win for everybody.

Shareholders are happy because they get Rs. 40 special dividend per share (In addition to normal dividend of Rs. 5 per share.

Tata Sons gets approx… Rs. 10500 crores as dividend.

Tata Sons will invest Rs 6495 crores in Tata Motors at a depressed price of Rs. 150. It will increase stake from 35% to 44%

Tata Motors will be able to reduce debt and it will help in its recovery.

This is part of Chairman N Chandrasekaran’s plan to clean up the capital structure and strengthen the Tata Group’s companies’ balance sheet by investing ₹10,000 crore in group entities this year.

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What may happen post this verdict by NCLAT.Seeking fellow boarder views

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Just going back to the question which has prompted opening of this thread - the DVR discount. If anyone had followed the DVR discounts over years you will notice that the DVR discount is currently at its highest ever at about 60% as compared to Tata Motors shares.
I have taken a trend over the last 5 years starting March 2015 and and noticed that between 2015 and Mid 2017 the discount was in the range of 36-40% and from July 2017 onward this has started moving upwards and as mentioned above currently settled at about 60%.
Has any one analyzed the reason - is it because the market think that Tata Motors Shares are significantly over valued or is it just an anomaly which will get corrected in the due course?
I believe the gap will get bridged either when

  1. the company start paying dividends(eventually) and then the dividend yield of DVR help discover the right price OR
  2. Tata Motors find a buyer for the JLR(which is remote considering the Tata group companies including Tata ELXSI makes significant amount of money from these units in form of technology development and support services fee and it makes perfect sense to keep them with in the group and milch).

Thoughts are welcome.

Thanks,
AJ
Disclosure: Invested.

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Very true. Dividend will help price discovery.

Only challenge I see that I don’t see that happening in near future with given -ve cash flow and investments required.

Disc: Invested

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I had done similar work on the price discount between the two. My figures are different as I am calculating how much is the ORG premium over DVR.

Price and Difference Chart since FY09.

TAMO ORG vs DVR Price Difference
TAMO ORG vs DVR Price Difference2463×1954 602 KB

Here are the averages of the quartiles in which this difference has historically traded. The current difference is amongst the highest ever.

image

The relationship deteriorated somewhere in FY16 when the dividend policy changed.

image

Surprisingly, the PAT & CFO were still positive until recently. Management foresaw the need to cut the dividend with an increase in capital intensity.

image
image974×288 31.9 KB

I am guessing that the premium/discount/divergence won’t completely vanish until all the parameters of CFO, PAT, FCF and dividend not only show an uptrend but also stabilize. Unfortunately, with the investments needed in the coming decade for EVs, the probability of this happening is low. They could surprise with streamlining the operations, adding efficiencies but it will be a slow change.

image

Also, interesting to see that from the recent Sep-19 lows the ORG outperformed the DVR in the up move. As long as such sentiment-based moves keep occurring without actual improvement in fundamentals, it is better to play with the ORG than DVR.

Yes, the divergence between the two is amongst the highest ever, and I myself had thought of playing arbitrage between the two when the divergence as per my numbers had crossed 100% back in Feb-19. Unfortunately, such arbitrage trades do not work in stocks with such volatile fundamentals.

So yeah, play the sentiment trade carefully. If fundamentals improve the DVR will be the winner, if they don’t, things could stay status quo, if they deteriorate, the DVR could hurt you more.

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There has been no real reason for a change of differential between the 2 share classes over the last 6-7 years.
Catalysts could be:

  1. Dividends
  2. Change in votes or categorization of DVRs (similar to what Future retail did)
  3. Sale/ Spin off/ IPO of
    Tata Motors Finance OR
    Tata Technologies OR
    Tata CV business OR
    Tata PV business OR
    JLR OR
    Sale of their stake in Tata Sons (they hold a 3.1% stake in Tata Sons or thereabouts - 12375 shares as far as I know)

Basically, its sad that they are letting DVRs trade at such low valuations

The DVRs imply you can buy all of the above for about 33000 Cr

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3.06% stake in Tata sons (whose market value is about 7,00,000 cr) is worth 21,500 Cr and after holding company discount of 30%, it is worth 15,000 Cr.

TML-DVR is trading at 25,500 Cr (if equated to Tata motors). So one pays 10,500 Cr for Tata Motors alone.

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The Q3 results look quite good given the context and are better than most estimates. Any thoughts from other boarders who are following TaMo

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Summary of results

  • JLR- Volumes are up 3% yoy, mainly attributed to china, which reported a 24% growth
  • JLR- Good response to Range Rover Evoque (30% growth) and Land Rover Discovery Sport (9.2% growth)
  • JLR- EBITDA margins came at 10.8%
  • Domestic - Volumes down 33% yoy, EBITDA margin came at 1.1%, PBT (1024cr)
  • Overall- Decent result with overall PAT of Rs.1756 cr, with EPS of 5.12 for the quarter. The negatives are lower qoq margins for JLR, sluggish performance by domestic business.

Regards
SJ

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Tata motors Jan sales figures.

“Commercial vehicle domestic sales in January '20 was -15% lower than last year. Retail was ahead of wholesale for 7th straight month in a row, helping further stock reduction, as we move closer to BSVI transition.”

PV is -22%.

Since the deadline to roll-out BS-VI is April 2020, what kind of unsold inventory Tata’s hold.

I do see in Sept 19 results.
System stock reduced by ~3.4KCr (TML +Dealership)
Q3 results:
System stock reduced further by ~ 3.8KCr (TML +Dealership) taking the total to ~ 7.2KCr for the year
That would mean if they manage to clear 3.6 K Cr this quarter, the remaining would be another 3.6K Cr worth of system stock. I assume most or all of it would be BS-IV compliant.

Will any remaining inventory needs to written off or will it be allowed to be sold?

This may be one factor to see if Tata Motors is investment worthy now or if further downslide expected or not, just in terms of domestic market. Any one tracking Tata Motors now, would you comment?

Also JLR sales will get impacted in china due to Corona Virus outbreak since the overall sales in retail were down by 2.3% even after China registered a growth of 24.3% in last quarter.
Any one tracking, please share views on this as well.

Or any other factors can impact the market in short term of 1-2 months to see if we can get better entry points breaking recent lows. Stock is already near 200 DMA levels. I think latest promoter buying/warrants were at 150 levels.

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Article on Tata Motors:

https://seekingalpha.com/article/4324181-tata-motors-seems-of-value-trap-value-opportunity

(Disc: No positions)

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Has tata motors declared their worldwide sales for the month of January 2020?

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I’m also not able to see it on their site. Normally they used to declare the numbers by 7-10th of every month. For last 3-4 months, they’ve been posting the numbers around 15th of the month.

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Hi mr. Chandragupta, could you please upload free version of the attachment. Thanks.

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Strange but it was not behind paywall at that time. Even I cannot access it now.

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Hi,

Tata Motors eyes zero debt

Thanks,
Deb

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