Tata Motors DVR - A Comparison with DVRs in USA markets - PINC Note

PINC Research's analysis shows that Tata Motors Differential Voting Rights (DVRs) shares, the first of their kind in India, are trading at a discount. PINC Research believes this discount should narrow when the market becomes more familiar with DVRs and because Tata Motors' DVRs are eligible for 5% higher dividend rates than ordinary shares.

Comparison with US DVRs to put the high discount on Tata Motors' DVRs in perspective
Is the high discount of 35-40% on Tata Motors' DVRs justified? Since these DVRs are the first of their kind in the Indian market, absence of historical data in India makes it difficult to analyze and conclude on this. So, we chose to analyze various DVRs listed in the US markets to understand pricing of DVRs. Based on our analysis, we arrive at the following conclusions.

1. Discount on DVRs generally ranges from 0-10%. DVRs of Berkshire Hathaway, for instance, trade on par with ordinary equity shares.

2. A higher dividend rate on DVRs reduces the discount. When dividend on Newscorp DVR reduced in ‘08, discounts widened. This suggests that investors were placing a value on higher dividend rates.

3. Investors perceive voting rights to be more important especially when the company or the financial market is going through a rough patch. During this period, discounts tend to widen as investors prefer to have more decision making rights in the company. This is visible from widening of discount rates during the phase of the global financial crisis during 2008.

PINC Views

Based on our analysis of stock price data of DVRs in the US markets, we conclude that the current discount on Tata Motors DVR is high. Moreover, Tata Motors' DVRs are eligible for 5% higher dividend rates than ordinary shares. We believe this would be another factor that would contribute to narrowing of discounts on Tata Motors' DVRs. Following the Tata Motors DVR issue, two more Indian companies, Pantaloon Retails India and Gujarat NRE Coke, have made DVR issues. As more companies start making DVR issues, market awareness about this would spread and the discount on DVRs would be determined by market dynamics. We believe that as the Indian markets become more familiar with this instrument, the discount should come down to 10% from the current levels.

Source : Equity Bulls

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