One of the beauties of the markets is that they are based on the whims of human behaviour.
This is quite brilliant.
Tata Motors DVR 'A' shares
1/10th the voting rights, equal claims under liquidation and entitlements and 5% more dividend.
i.e. I need 10 DVR shares to cast a vote equivalent to a normal share's vote.
5% dividend: On a face value of INR 2/-, a DVR shareholder is entitled to 5%*INR 2 = INR 0.10 more of dividend against a normal share's dividend.
A company which has good corporate governance need not need shareholder activism especially if the some strong insurance funds and the promoter holding is excessive. Ergo, A Kingfisher Airlines may need shareholder activism whereas an Infosys would not. This of course is debatable but even in case of a dispute, the odds of shareholder activism in Infosys would be limited to something like "Please disburse cash" or "Please change your auditor".
If more A Shares are issued, the entire shareholder base is diluted and hence A shares are more or less the same as the normal shares (except for the voting rights).
If I were to say all the above, which flows correctly in terms of logic, one would assume both classes of shares to be trading at a similar price.
Fact: A Shares have traded at a 30%-50% odd discount to normal shares for a long time now.
However, and this is what most analysts fail to recognize, the shares are not convertible, and hence that does not necessitate convergence of values. But, the above information does necessite convergence.
In addition, the convergence can be in any direction.
All the posts I have read or people I have spoken to say that there is no logic for the huge discount, but they always talk in relative terms.
I say: Forget the discount. Focus on the price that is being demanded. Forget the normal shares' price. Focus on the DVR shares because they offer a roughly similar entitlement.
DVR A shares trade at INR 140 on a total base of 320 Cr odd shares which gives the company an equity value of INR 44,800 Cr or INR 448 Bn. Factor in some conversion and issues and we may come to INR 47,000 Cr.
PAT for the year was INR 13000 Cr largely because of a tax break. However, the tax break was real although not sustainable. Let's negate for taxes and PAT may reach INR 9000 Cr.
In addition, FY12 was not what one would call a good year; it was a 'decent' year. Just read about the Eurozone crisis, and the India slowdown and the US recovering and the China mystery :P
Alternatively, when one looks at fund flows to equity shareholders from JLR, it is a hefty INR 8500 Cr after R&D expenses and capacity investments of about GBP 1.5 Bn or INR 12000 Cr.
Muy Bien?
The India business' fund flows are not very clear but my estimate is that it was negligible because of the poor performance of the passenger vehicles segment and investments in capacity.
Based on broad ranges, the price of DVR shares seem to be attributing a value of 4x-6x P/E or a 5x-7x P/Cash Flow based on FY12 earnings.
The markets are brilliant because very few people can wait to see this market inefficiency be erased.
Retail investors are not patient.
PE investors will move away in 5/7 years.
MFs are subject to retail investor moods and always hold a diversified portfolio.
Luckily, I have a 10 year + horizon.
The potence of Tata Motors and of JLR is formidable - that evaluation will remain proprietary.
