Tata Motors’ DVR discount near two-year high

Despite Nifty inclusion, DVRs have underperformed ordinary shares

The price differential between ordinary shares of Tata Motors and the ones with differential voting rights (DVRs) is the highest in nearly two years.

On Wednesday, shares of the automobiles maker closed at ~469.5, about 41 per cent higher than the DVRs which quoted at ~276.2. Since their issuance in 2008, the DVRs have always traded at a discount to the ordinary shares; however, the premium has widened from 20 per cent last January.

Investors have found the DVR ones unattractive despite the stock exchanges allowing these to be part of the indices. In April 2016, the National Stock Exchange added Tata Motors; DVR to its flagship Nifty 50 index. With effect from June 19, the DVRs will also be part of the benchmark Sensex on the BSE exchange.

Inclusion in both of these invariably results in a stock getting more investment, particularly exchange-traded funds. This has not been the case with the DVRs. Since April 2016, while shares of Tata Motors have gained 21.5 per cent, the ones with DVR have declined 4.3 per cent.

Analysts say lack of dividend payouts and liquidity concerns could be reasons. The DVRs are similar to ordinary shares but come with less voting rights (one vote for 10 DVR shares as against one vote for one ordinary share). To compensate, the DVRs pay higher dividends.

One reason investors have preferred the ordinary shares is there have been hardly any dividends paid by the company to lure them towards the DVR ones, analysts say. Tata Motors isn’t a big dividend payer. In FY15, it paid none; in FY16, only ~0.3 on one DVR and ~0.2 per share.

Another important reason why institutional investors have preferred exposure to Tata Motors through ordinary shares is liquidity. “Trading volumes in DVRs are typically a fraction of ordinary shares. Large investors prefer the more liquid ordinary shares, as they usually buy and sell huge blocks,” said an analyst. Limited voting rights is another issue. “Our conversation with institutional clients show they prefer shares with voting rights. That’s one of the reasons why DVRs are under-owned,” said Deven Choksey, managing director, KR Choksey Investment Managers. However, given the wide discount at present, many feel the DVRs could outperform. Ambareesh Baliga, independent analyst, says there is no reason for DVRs to quote at such a huge discount when they are only ordinary shares with limited voting rights.

Choksey says with inclusion in the Sensex, the DVRs will gain more acceptance as funds tracking these will soon start buying in the counter.

Lack of dividend payouts and liquidity concerns are reasons investors have preferred buying ordinary shares