Tata Motors DVRs: those who kept faith have been rewarded

Since February 2014, while the Nifty has risen by 28%, shareholders of Tata Motors Ltd have been less fortunate—the company’s shares have risen by around 21%. But not all Tata Motors shareholders had to live with underperformance. Those who own the company’s ordinary ‘A’ shares, or shares with differential voting rights (DVRs), have been far better off. Their return in the same period stands at nearly 69%, or more than three times what ordinary shareholders earned.

In February 2014, before the rally in anticipation of a new government, the DVR shares traded at a discount of around 50% to the ordinary shares. The discount has narrowed to around 30% currently.

As pointed out earlier in this column, Tata Motors DVRs tend to do well in a market upmove.

Besides, the inclusion of the DVR shares in some important indices has also helped. In the past few years, they have also become far more liquid and ownership is widespread, unlike in the initial days, when most of the stock was owned by promoters and free float was low. Those who kept the faith in the DVR shares back then have been rewarded.

Will the discount narrow further? This is difficult to say, although a number of analysts recommend buying the cheaper DVR shares to those who are planning to take an exposure to the automobile manufacturer.

In recent months, sales at subsidiary Jaguar Land Rover (JLR) have done well, despite the drop in sales in China. Retail sales data in November was better than expected, with overall JLR sales rising 27% from a year earlier. Note that sales had risen by only 2.6% in the first seven months of the current fiscal year. Sales are being driven by new launches such as the Jaguar XE. Last month, sales in North America and Europe rose by 52% and 69% to 8,448 units and 21,355 units, respectively.

Needless to say, higher sales result in better operating leverage, and hence higher profit. Note here that JLR accounts for over four-fifths of the total valuation ascribed to Tata Motors by brokers such as Nomura Financial Advisory and Securities (India) Pvt. Ltd. As such, the revival in sales growth will undoubtedly get investors excited.

And if such reasons for bullishness remain, DVR shares may well continue their outperformance.