Tata Motors Board Cancels All DVRs Through A Scheme Of Arrangement
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00:00 Hi, thanks so much for tuning in. You're watching BQ Prime and we're here to talk about arguably
00:04 what will be the stock or rather the stocks of the day, Tata Motors as well as Tata Motors
00:09 DVR. Of course, the results were posted yesterday, but the bigger talking point happened with
00:14 regard to the corporate announcement that was made with regard to the DVR shares and
00:18 the fact that the company is going to be cancelling these DVR shares. All holders of the Tata
00:24 Motors DVR will receive seven ordinary shares of the company in exchange for 10 that they
00:29 hold. What are the implications of this? Why is the company doing it? And what should investors
00:34 do? To talk about all of this and more, I have with me Devin R Choksi, who is the director
00:41 of DR Choksi FinSev joining us. Devin, thank you so much for taking the time. Hiral is
00:46 with me as well. Hiral, good morning. And Devin, good morning to you as well. To start
00:50 with, let's start with a slightly open-ended question because I think a lot of shareholders
00:54 will be asking this, Devin. Why would the company be doing this? Good morning, Alex.
01:00 Good morning, Hiral. Well, I feel that I think there is an underlying purpose. If you look
01:06 at the disclosure statement, I think which the company has given, they have very categorically
01:13 stated something which the market was aware about, that the very purpose of DVR has failed
01:19 actually. When they launched the DVR shares, subsequently, Sele also came up with a regulation
01:26 that companies cannot issue the differential voting right shares. So subsequent to that,
01:31 I think none of the companies could offer the DVR shares and those companies which issued
01:35 like Tata Motors, I think they continued to hold on with DVR. But actually, the purpose
01:39 has not materialized because if you see the difference between the ordinary shares versus
01:44 the DVR shares, it has remained in the vicinity of 40% to 55% in a given market situation
01:50 all along throughout its listing. And that is not something which is healthy. In the
01:55 other parts of the world, when I think differential voting right shares are issued, the difference
02:01 is not as high as what it is in India. I think out there the difference is somewhere around
02:05 25% or so. Even though all of the rights, including the liquidation right, would remain
02:10 same for DVR shareholders, yet I think this difference has remained for a variety of reasons,
02:15 I believe. Even though this part of liquidity, this part of participation index, etc. In
02:21 my viewpoint, I think this discount had to be cut down and the shareholder had to be
02:25 rewarded with the kind of value. That is the first purpose which I see from the underlying
02:30 statement. The second purpose that I see from the underlying statement that the company
02:34 has given, I would think that they also want to bring down the equity, shrink the equity.
02:40 That means it's a very powerful statement coming up from the company's side. On the
02:45 other side, I think the business operations are assuming the normalcy, including JLR portfolio.
02:51 And at the same time, I think this particular equity reduction would act as a financial
02:55 re-engineering process which would eventually lead to better ROE, ROC ratios going forward.
03:01 So that is another purpose. And I think the last but not the least, as I see, I think
03:07 the company has probably announced a silent statement, I guess, I think in this particular
03:12 announcement. Probably through the consolidation of this equity, there has to be some game
03:17 plans related to inorganic growth possibility for the company, which could include, I think,
03:23 game plans pertaining to the separate listing of JLR as well. That is also one of the possibilities.
03:30 In order to avoid the confusion, I believe, I think this particular transition has happened.
03:35 In a way, it is good for shareholders, because if you see yesterday's price movement, I think
03:40 the market price discount has come down to 19% on the swap shares, as we call it as now.
03:47 Because I think for every 10 shares, you're going to get 7 shares. If you calculate the
03:51 arithmetic, probably you will find that I think it has come down to around 19% kind
03:56 of a discount, which in my viewpoint, I think is a fair discount, given the fact that around
04:00 12 to 15 months of period is being considered, I think, for the NCL killer daughter coming
04:06 in and effecting this particular transaction of consolidation of shares into one. So overall,
04:13 I think the shareholders tends to benefit from DVR, as I see it, and that is a good
04:17 news.
04:18 Right. Thanks, Devyan, for that, you know, overall structure. But so clearly, benefits
04:22 in terms of Tata Motors and benefits in terms of shareholders is what we've discussed so
04:26 far. Now, when you talk from a stock price perspective, the spread that was available
04:32 between the DVR and Tata Motors is something which was coming in as an arbitrage opportunity
04:36 for the investors for today. Now, in pre-open, you're already seeing the DVR, which is indicating
04:43 a 20% up move, right? How do you see the spread? Because do you think capturing that arbitrage
04:51 opportunity is now going to still be a possibility, lucrative enough, because the timelines are
04:56 still 12 to 15 months?
04:58 Yes, absolutely. I think arbitrage opportunity will continue in the given market situation.
05:04 Of course, I think now the cat is out of the bag. So obviously, I think you know the ratio.
05:09 And as a result of which, I think it's going to be more predictable price difference than
05:14 what it was up till now. So certainly, I think, suppose it's a 20% up move has taken place
05:19 in the price, I think, or maybe I think with this market starting, it will get confirmed.
05:23 I would think that I think this particular differential will continue. Because as I was
05:27 making a point that when you have 12 to 15 months time to implement the entire consideration
05:32 process, what you would now consider is an interest factor. So suppose if I ended up
05:37 buying the DVR shares today with a conversion into the ordinary shares, obviously, the discount
05:44 I'll ask for, because I think this is going to be continuing for whatever the period till
05:48 that point of time, it is getting implemented. So I would think that I think around 17-19%
05:53 kind of a discount that I'm alluding to, I think is likely to remain. As a result of
05:58 which, I think stock price probably may inch up and not come down as I see it for DVR.
06:04 Also the fact that Tata Motors own performance is I think working good. So obviously, I think
06:08 the ordinary shares are likely to go up along with DVR. So in my viewpoint, I think one
06:12 can possibly see the upside continuing in DVR. And if my target goes right, I think
06:18 one year down the line, we should be seeing a target price of somewhere around 535 to
06:23 550 for DVR going forward.
06:25 A follow up to this Devyan is let's take two scenarios, one for existing shareholders of
06:31 Tata Motors and Tata Motors DVR and one for someone who wants to build fresh positions
06:36 there. Obviously, the spread or the arbitrage opportunity will actually shrink. And let's
06:44 hypothetically take that shrinks to around say 8-10% overall. Now, if that happens, do
06:50 you think existing shareholders should actually go ahead and unwind their position number
06:55 one right now? And the second aspect is, what would be that gap where fresh positions could
07:03 be taken according to you?
07:07 The first question is relatively easy question and the second would be slightly a question
07:12 with a lot of math involved in it. But let me attempt an easy one first. Yes, I think
07:17 the investors should hold on to this particular position which they are having in DVR. Because
07:22 as you know, I think this is going to get converted in 12-15 months time. But certainly
07:26 there is no difference as such as far as I think they're holding into this particular
07:30 position, the minority shareholders who are holding on to this particular position. The
07:36 second part of it, I think what price differential one should be buying. According to me, I think
07:41 currently as I've explained for every 1000 shares of DVR that you buy, you are paying
07:46 about 375,000 rupees. If you basically convert the 1000 shares into 700 shares, because I
07:53 think it is eventually the ratio, then the actual price coming out to be as 535. So from
07:59 a point of view of looking at I think the buying opportunity, if you get I think this
08:03 particular stock at a lower price to 535 in next one year time, I think that would be
08:09 the buying opportunity as I see it. Because that is the difference it will get covered
08:13 up with in next one year time.
08:15 Devin, I think we're also going to be set to speak to the management to try and understand
08:20 some aspects of this. But we're also trying to understand from the investors perspective
08:25 what the tax implications of this would be. Have you studied this? And there is also a
08:30 question about deemed dividend. How does that work?
08:34 It's a valid question, Alex. And honestly speaking, I think since yesterday evening
08:39 it announced and I think today, we haven't been able to get the complete opinion on this
08:43 particular subject. So maybe I think we'll have to wait for some time to eat the brain
08:48 of some tech expert and find out how exactly this is going to work out.
08:52 OK, fair point. In terms of and then see, we haven't spoken about the earnings at all.
08:57 And you've spoken about potential for Jaguar Land Rover listing as well down the line.
09:01 We've seen kind of a turnaround story, if you can call it that, for Jaguar Land Rover
09:06 post the pandemic. I'm sure you've also gone through the numbers. So why don't you also
09:11 take us through the roadmap as you see it, as you see it rather for both Tata Motors
09:15 as well as Jaguar Land Rover and in particular Jaguar Land Rover. Do you see earnings trajectory
09:20 going significantly higher from this point and do you still see value then in Tata Motors?
09:26 Yes, I think the domestic Tata Motors portfolio of passenger vehicle and commercial vehicle
09:33 particularly, I think they remain absolutely very convincing. Commercial vehicle portfolio
09:39 of Tata Motors domestic business, I think is likely to grow significantly given the
09:43 fact that government spending on infrastructure and industries and new business additions,
09:49 I think, ground field expansion, green field expansion, allowing higher amount of consumption
09:54 or higher amount of demand for the vehicles, commercial vehicles. At the same time, I think
10:01 with the new roads getting constructed and the logistics being emphasized, in my view
10:05 point, I think the demand for commercial vehicle is only going to increase from here on. And
10:10 adding to this, a swifter would be the scrappage vehicle policy, vehicle scrappage policy rather.
10:16 This is going to create additional demand for commercial vehicles in respective categories,
10:20 the heavy commercial vehicles and the medium commercial vehicles. I think somewhere of
10:27 around two to two and a half lakh new vehicle demand is getting generated in a year, I think
10:33 on a per year basis for next few years. So that is where I see the brilliant prospects
10:37 emerging for commercial vehicle portfolio in the domestic markets. At the same time,
10:42 the passenger vehicle portfolio, which is largely inclined towards the electric vehicles
10:48 and partly now also continuing with the IC vehicles. In my view point, I think this is
10:53 a portfolio which is likely to grow big from the current level onwards. As we see the price
10:58 difference between electric vehicle and IC vehicles start shrinking, even though the
11:02 subsidy is going out, I would think that I think this is where probably the company would
11:07 be in a much better position given the kind of market position that they have created.
11:10 I always say that what Maruti did in the 80s, I think Tata Motors is doing now with electric
11:16 vehicles. I think they are ahead of others as far as their vehicle portfolio is concerned.
11:22 And currently they have replaced the IC engine electric vehicle. In my viewpoint, I think
11:27 this particular situation will change. Eventually, I think exclusive electric vehicle portfolios
11:33 are going to come up and that is going to be more interesting proposition. So we look
11:37 forward with good amount of confidence as far as domestic portfolio is concerned.
11:41 Come to JLR portfolio, again the charter is very clear that from 2025 and I think the
11:48 vehicles which are now going to be offloaded onto the roads would be the electric vehicles
11:53 from JLR. And I see the possibility of getting higher demand for electric vehicle as the
11:59 particular situation of price differences comes down. In fact, one of the things which
12:03 I am seeing as a possibility in the global market with the battery swapping technology
12:07 becoming a reality, I see the vehicle cost and the battery cost be separated out and
12:13 the batteries would be available on a paper use basis vis-a-vis the vehicle which would
12:18 be available on a capital basis, a capital cost basis. If that situation pans out well
12:22 in the global economy, which I see a brilliant possibility happening now, that could possibly
12:27 be a game changer for most of the electric vehicle companies and likes of JLR, likes
12:32 of Volvo, who have basically talked about in global market going into electric vehicle
12:37 fully, that those companies are likely to see major shift and major benefits compared
12:42 to their peers in the marketplace. So I remain positive on that front as well. And if the
12:47 unloading or offloading or de-merger of JLR into a separate company, distilled company
12:53 takes place, that would be I think a real game changer to watch about. So we consider
12:58 all the possibilities to stay invested in the Tata Motors in the investment portfolio.
13:04 Absolutely. Thanks, Devien for getting us the details. And it's interesting to see the
13:09 kind of turnaround that we've seen on Tata Motors because I was just reading something
13:13 where it's clearly indicating now that it's actually beat Kia, which is a Korean company
13:22 to become the 16th most valued automaker in the world. And initially, we were always seeing
13:27 a fight for them in the domestic markets. But globally now, you have Tata Motors, which
13:31 has taken over Kia. And very lastly, if you see in terms of the Tata Motors A shares,
13:37 they've seen a rise of almost 16% to 17% as we speak. It's an all-time high of Rs. 435
13:42 per share. And you have Tata Motors, which is at Rs. 640, which is a marginal uptick
13:48 right now. So it's going to be interesting as to how investors react to the arbitrage
13:51 opportunity. But thank you, Devien, so much for joining us on the show and giving us the
13:56 details and throwing some light and perspective in terms of what could be in store for the
14:01 investors of Tata Motors as well as Tata Motors DVR. That's a wrap from Alex and myself. Lots
14:07 more lined up on the other side. You will hear the management of Mahindra Holidays,
14:11 who Alex will be talking to in just a while. Please stay tuned.
14:15 Thanks for watching.
14:24 [END]