Differential voting rights (DVR) share have different voting rights compared to an ordinary share e.g. Tata Motors' DVR share will have only 10% voting right compared to its ordinary share. These shares have a different dividend rate. e.g. In case of Tata Motors, the dividend for DVR has been fixed at 5% (of the face value) higher than ordinary shares e.g. In FY 11, company gave Rs 4 per share as dividend (200% on Rs 2/- face value) on ordinary shares and Rs 4.10 (205% on Rs 2/- face value) to per DVR holder. Apart from less voting rights & higher dividend there is no difference between intrinsic ownership rights of DVR & ordinary shares.
We recommend to Invest in TATA Motor DVR with the following Investment Rational:
Management with utmost quality of corporate governance: TATA, the promoters of Tata motors, is considered to be one of the finest institutions amongst the corporate sector; hence a steep discount (~44%) to the ordinary shares, is unwarranted.
Promoter stake sale improves liquidity: Initially, illiquidity and lack of institutional interest has seen DVR trade at a wide discount to the original stock. Probably, it does not make sense for the promoters to hold these shares with 1/10th voting rights. Hence, with the DVR holdings gradually changing hands from promoters to domestic and foreign institutional investors, liquidity in the stock is improving, making a good case for investment. The institutional holding has been on a steady rise over past 3 year from ~13% in Q4 FY09 to ~75% Q3 FY12 respectively. Promoter holding on the other hand has come down from ~84% to ~9% (~4.4 cr shares) during the same period, which is currently valued at ~Rs 670 cr.
Higher Dividend yield: The DVR’s carry one-tenth the voting rights of the main shares but pay higher dividends vs. the ordinary shares. Dividend yield is 2.7% vs 1.5% on ordinary shares.
Discounting should be rationalized: Historically DVR shares have been quoting at an average discount of ~30% vs current discount of ~45% and we believe this would be bridged.
Even though there are no benchmarks as to what price DVR’s should trade, globally they are traded at 15%-20% discount as liquidity there is relatively higher. We would suggest investors to buy Tata motor DVR as they are able to get the same intrinsic worth at a significant discount of 45%, which we believe should narrow down to 30%.
We have a hold rating on Tata motors ordinary shares. Adjusted to a 30% discount, DVR should trade at Rs 184 per share which gives a 25% potential upside from current price.
We recommend to Invest in TATA Motor DVR with the following Investment Rational:
Management with utmost quality of corporate governance: TATA, the promoters of Tata motors, is considered to be one of the finest institutions amongst the corporate sector; hence a steep discount (~44%) to the ordinary shares, is unwarranted.
Promoter stake sale improves liquidity: Initially, illiquidity and lack of institutional interest has seen DVR trade at a wide discount to the original stock. Probably, it does not make sense for the promoters to hold these shares with 1/10th voting rights. Hence, with the DVR holdings gradually changing hands from promoters to domestic and foreign institutional investors, liquidity in the stock is improving, making a good case for investment. The institutional holding has been on a steady rise over past 3 year from ~13% in Q4 FY09 to ~75% Q3 FY12 respectively. Promoter holding on the other hand has come down from ~84% to ~9% (~4.4 cr shares) during the same period, which is currently valued at ~Rs 670 cr.
Higher Dividend yield: The DVR’s carry one-tenth the voting rights of the main shares but pay higher dividends vs. the ordinary shares. Dividend yield is 2.7% vs 1.5% on ordinary shares.
Discounting should be rationalized: Historically DVR shares have been quoting at an average discount of ~30% vs current discount of ~45% and we believe this would be bridged.
Even though there are no benchmarks as to what price DVR’s should trade, globally they are traded at 15%-20% discount as liquidity there is relatively higher. We would suggest investors to buy Tata motor DVR as they are able to get the same intrinsic worth at a significant discount of 45%, which we believe should narrow down to 30%.
We have a hold rating on Tata motors ordinary shares. Adjusted to a 30% discount, DVR should trade at Rs 184 per share which gives a 25% potential upside from current price.
