Tata Investment Corporation: Unusual discount to NAV

Attended Tata Investment Corp AGM yesterday . Had discussion with Noel Tata on undervaluation .

He admitted that undervaluation is high , but he said options to correct the same through buy back is limited as Tata sons are close to 75% thresold .

He has welcomed shareholders to give him suggestion what management can do correct it .

Suggestions like Bonus , buyback , splits were given . But would appreciate valuepickr readers to give unconventional approaches you have so that I can collate and send to management .

Regards
Shailesh Naik

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I don’t want share prices to go up in a hurry as I accumulate on monthly basis for long term :slight_smile: But bonus dividend will be a welcome step. Increase dividend when there are fewer investing opportunity.

They should also focus on creating long term value by investing in unlisted/PE/lending kind of opportunities which are not available to MF.

Look at delisting at NAV level.

To me buy back seems to be the best potion. It is a win - win situation for
promoter and other stake holders.

The price should be in between market rate and Nav.It is beneficial to the
company also as it will have margin of safety.

Other cash rich holding companies may follow the same either to increase promoters
holding upto 75% or unlock value.
Thanks.
Dis

Can you please discuss any other topics which came up for discussion in the AGM.
I am also invested with the hope that management goes for delisting in the future.

People were asking usual things like higher dividend etc … Delisting is difficult as Tata sons don’t see shareholders will surrender the share ( past experience ) so buyback is ruled out . But they are open to bonus & splits as a option to reward shareholder and create more shares to improve liquidity .

But request you all to send your suggestions to their investor relation team . We need to actively ask management to communicate the value it has generated also question them on portfolios that don’t generate value .

I agree with Shailesh.

India has on of the largest retail investor base but lacks proactive engagement with companies.

A shareholders has the right to demand for answers, and in some cases seek redress from Board, and lastly push regulators to demand answers.

I would rather that the company keeps doing the same, without “value unlocking”. If the value stares at you and you can’t see it, great-it gives a buying opportunity to those who see the value. This stock, IMHO, is like buying a mutual fund unit at 40% of NAV. Even if the investment performance is not great, the initial discount provides comfort. Hopefully, in some years, 5, 10, 15 perhaps, there will some “value unlocking”. Till that point, I would rather do an SIP here than in some mutual fund.

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I agree on the points. Only thing is that Mutual Fund structure is very tax efficient structure where the fund and investors both do not pay tax (Long Term/Dividend). While in this case, the company pay tax (including MAT) on their income and DDT also applies.

One suggestion is instead of paying dividend they do buyback through tender offer (at a price which is in between post tax NAV and CMP), wherein the promoters can also tender their shares to keep their holding at 75%.

Disc: Holding shares

That is true. But one good thing is cost structure for fund (except for these taxes) is pretty low which comes to be less than 0.5% compared to about 2% for MFs.

The only way to look at performance of this stock is how fast NAV is increasing vis a vis benchmark Mutual fund NAV or Nifty . Tata Investment Co has introduced a concept called Value Created and it reports it in its Annual report and Monitors it pretty well . The Fund has done as well or bad as any mutual fund in recent years . ,

But additional advantage here is discount to NAV . This is additional catalyst over traditional compounding thru NAV Gr

I was a shareholder of Tata Investment in 2013 to 2015 and I also attended their AGM in 2014 and talked to Noel Tata along the same lines. this time it looks like they are paying more attention to the retail investors. In 2014, general tone of the management was that low share price is good as it allows investors to earn a higher dividend yield as long as discount to NAV does not go up. They expect their NAV to go up along with a diversified index like BSE-200. So this is like an index fund with extra dividend yield because of the discount to NAV.

The only way Tata Inv Corp share price will go up is if they raise dividends and that is only possible if they earn higher dividends/interest from the portfolio. Bonus is just cosmetic. Liquidity will help but 500 is not a high price for retail investors to shy away. There are a few things they can do to improve shareholder value.

  1. Switch to 100% equity portfolio. they have 30% portfolio in debt which is subject to multiple taxation, (interest is taxed, post tax interest is distributed as dividends and that is taxed (DDT) and now for large investors dividends are also taxed). Return on debt is also low.
  2. Concentrate non-tata group holding into 10-15 stocks to generate better return on this part of the portfolio. Non tata group stocks are anyway only 30% of the portfolio.
  3. Focus on high dividend paying stocks since NAV growth is not paying off. Such dividends can be passed on to investors.
  4. Become tax efficient. their tax rate is high. they are more like a closed end mutual fund but mutual funds don’t pay taxes on portfolio income as it is a pass-though income but TINV pays taxes being a corporate entity.
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Debt portfolio is only around 10% now. In an earlier response in this thread I have provided portfolio break up.

Thanks. My numbers are from my memory back when I was owning the stock. they are reluctant to reduce the debt part of the portfolio because they currently use the interest income to pay dividends. If they switch to 100% equity, incremental dividend income will not offset loss of interest income.
Considering all this, I think their dividend of 17 will grow at about 5% long term and if you discount that at a more optimistic 9%, you get a valuation of 446 rs/share. That’s my most optimistic valuation but it is still about 15% below CMP.

Great to know you too attended AGM in past . We all need to be part of AGM together to force through our views .

TIC investment philosophy has changed only recently . They have started A metric called “Value created” and they are keen to be measured on the same ( internally and by investors )

“Value Created” is a measure which evaluates the wealth created net of the capital invested by the shareholders. “Value Created” is the Realisable Value of Investments as on 31st March to which is added Net Current Assets and Fixed assets while any contribution from shareholders is reduced

They are also saying they will retain good portion of dividend recd and reinvest into stocks . Debt portion is part of asset allocation and they will dip into it when market is attractive ( I think it is good strategy to have debt portfolio of 10% - 25% ) .

On point 2 . They have continuously reduced No of companies they hold over last 10 years ( from 250 odd to 110 now ) . So directionally they are on that path. Now whether the stocks need to 10 -20 or 100 is a big debate … Pl look at no of stocks held by mutual funds … They too are a pretty long list …

On point 3 : They are not focussed exclusively on high dividend stocks … Their dividend Yield is good … ( I wish they paid less dividend and focussed more on investing the surplus )

On point 4 : All expenses incl Tax account to less than 0.8% of AUM and it is pretty reasonable for actively managed fund . But yes there is scope to work on Tax management . We can discuss this with management.

Re posting calculation for every one’s benefit.

In Effect you are getting an aggressive Balanced fund at NAV (as tradeable non-Tata equity(80%) and debt of 20% is equal to market cap.

You are getting another closed ended unit of fund which is value of 1.4 times NAV consisting of Tata companies.

Below is calculation:

  1. Non Tata Equity Holding: 2170 cr
  2. Bond/Debenture/MF/Cash: 600 cr
  3. NSE holding: 80 Cr @ 6000 Rs/share (expected listing price is 6000-8000 based on current valuation)

Icing on the cake (This is much bigger than the cake itself)
3350 cr of Tata Blue Chip stocks like Titan/Tata Motors/Tata Chem/TCS/Tata Steel/Tata Global etc
500 cr of Tata non-listed

Therefore this should not treated as typical holding companies which derive their value from 80-90% of few group companies.

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Good to see market rewarding value by 15% up move. Anyone aware of any triggers which may have caused this.

I’ve been tracking TIC for some time now and I became very interested recently 'cos of the massive discount to NAV. I don’t know of any new fundamental trigger (other than the NSE IPO announcement, which in any case shouldn’t be material, given the small holding). The other possibility is that it’s simply playing catch up since a couple of its portfolio investments have moved up sharply (Tata Chem especially). Yesterday’s move was pretty spectacular in volume and price. Above 600, it could move up rapidly since it would break out of a symmetrical triangle formation that’s been in place from the highs of Jan 2008 (900) and the lows of Jan-Feb 2009 (around 200).

From the Annual Report, the most interesting takeaway was that they’ve grown their NAV at 20% CAGR over the last 16 years. That is an amazing statistic and probably beats most Mutual Funds. Definitely worth including the portfolio.

Just noticed this on NSE. Not sure what it means.

Analysts/Institutional Investor Meet/Con. Call Updates24-Aug-2016

Tata Investment Corporation Limited has informed the Exchange regarding Intimation of Schedule of Institutional Investor Meeting.

True that has been thesis. As mentioned in my earlier response, even if we ignore Tata group investments as they can not be traded (which forms > 60% of BV), non-tata group investments value itself account for current market cap. These can be easily sold and re-invested like any other MF. So there is a MoS of > 60% in terms of blue chip Tata group stocks.

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