The stock is up a huge 33% in the last one week whereas the gains over the last three months and the last one year stand at 75% and 83% respectively.
This is almost double the returns earned by the BSE Smallcap index and quite good to be honest.
If one looks up on the internet for the possible reason behind the rise, there’s nothing significant that shows up.
The company’s recent quarterly results have also been business as usual. Both the topline and the bottomline have grown at around 15% YoY for the September quarter. Not bad but not extraordinary either.
On closer inspection, we came across an article on Bloomberg that attributes the sudden spurt in the stock price to the upcoming IPO of Tata Technologies.
However, the line below the title of the article puts you off. It says that Tata Investment Corp owns just 0.33% stake in Tata Motors, which is the promoter of Tata Technologies and the biggest selling shareholder in the IPO.
The article does not have details on whether the meteoric rise in the company’s share price due to the IPO of Tata Tech is justified.
So, let’s do some back-of-the-envelope calculation. Going through the annual report of Tata Investment Corp, we found out that the company owns 11 million shares in Tata Motors, which indeed amounts to a 0.3% stake in the company.
Tata Motors in turn owns 75% in Tata Technologies, one of the most awaited IPOs in recent times.
Now, there are talks that the IPO may list at a whopping 70% premium to its upper price band of ₹500 per share. This results into a listing price of ₹850 per share.
As Tata Motors holds 303 million shares of Tata Technologies, the total valuation of Tata Motors’ stake in Tata Technologies at a listing price of ₹850 per share, comes to close to ₹260 bn.
Now, here is where it gets interesting. Tata Investment Corporation, the stock under discussion today and the one that has soared because of the imminent listing of Tata Technologies, holds 0.3% in Tata Motors.
This means that its share in the ₹260 billion worth of value unlocking for Tata Motors would also be 0.3% i.e. ₹0.78 bn or ₹780 m.
Now, Tata Investment Corp has 5.1 m shares outstanding and therefore, the value unlocking for Tata Investment Corp of ₹780 million translates into a per-share value of just ₹15 per share or thereabout.
Yes, that’s correct. The benefit to Tata Investment Corp or the value unlocking from the listing of Tata Technologies for the shareholders of Tata Investment Corp would be just ₹15 per share.
And by how much the shares of Tata Investment Corp has gone up over the last few months? Well, the stock has almost doubled in the last few months — it has gone up by more than ₹2,000 per share.
We hope you are getting the discrepancy. An IPO that’s likely to add just ₹15 per share to the overall market value of Tata Investment Corp, is being held responsible for the nearly ₹2,000 per share price increase the stock has seen in the last few months.
That’s ridiculous in my view. Even if you consider the share price increase of the last one month, it has risen by more than ₹1,100, which is huge and still can’t be attributed to the Tata Technologies IPO.
We guess the real reason behind the meteoric rise of the company’s share price was the significant discount it was trading at to its NAV per share till a few months back.
You see, Tata Investment Corp, as the name suggests, is an investment company. It does not have a business of its own, that is, it does not manufacture anything and neither does it sell any service.
Most of the revenues and profits are generated through the dividend and the interest income it earns from the various investments it has made, both in equity as well as debt, over the years.
Of course, it also earns capital gains whenever it exits any investment. There’s no other major source of revenues and profits for the company.
By the way, the company has done a good job of managing its investments over the years. How do we know this? This information is given in the company’s annual report.
Every year, it devotes a page to discussing the value created through its various investments and then compares it with the returns provided by the BSE 200 index.
Well, the annual report for FY23 highlights that between 2008 and 2023, Tata Investment Corporation’s value creation has compounded at a CAGR of 14% versus 9.4% returns earned by the BSE 200 index.
In terms of absolute growth, while Tata Investment Corp has been able to bring about a 7x growth in value created, BSE 200 index has multiplied investor wealth by 3.8x. This is indeed impressive in my view.
Besides, this does not include dividends and buybacks it has done over the years, which may tilt the scale in the company’s favour even further.
Now, there’s another section in the company’s annual report that holds the secret to the recent rise in the company’s share price.
This is nothing but the total equity per share of the company.
Please note that by virtue of being an investment company, it has very little by way of fixed assets or any other assets and liabilities.
Thus, the total equity per share (sum of the market value of all its investments incl. bank deposits) of the company can be considered as a good proxy for the intrinsic value or the fair value of Tata Investment Corporation.
Think of it this way. If you have to buyout the entire portfolio of stocks and debt investments of your friend, how much would you be willing to pay for it?
You will figure out the market value of the entire investment book and then decide accordingly, isn’t it?
Well, this is exactly what total equity per share means.
You should have a simple thumb rule for buying stocks like Tata Investment Corp. You should check out its latest equity per share (based on market value and not book value) and then try and buy it at a small discount to this value.
Now, when the FY23 annual report of the company came out, the total equity per share stood ₹3,835 per share. And as recently as September, the company’s share price was in the region of ₹2,400 per share.
This meant that the stock was trading at a significant 40% discount to its equity per share or the market value of all its equity and debt investments put together.
By the time the September quarter results were announced, the company’s book value per share based on current market value, had touched the ₹5,000 per share mark.
Hence, the discount was now as high as 50% or put it differently, the stock had 80-100% upside potential if it were to trade anywhere close to its book value.
We do believe that one should not value investment companies like Tata Investment Corp at 1x book value but should certainly keep some margin of safety to account for the volatile nature of the stock market.
Some investors like to keep this discount as high as 50%, there are others who are okay with a 20% discount, especially for a stock like Tata Investment Corp whose value created, or book value, has increased consistently at 15% CAGR over the long term.
Hence, you need to decide on this discount as per your style and philosophy and invest accordingly.
One thing is clear though. The rise in the company’s share price had little to do with Tata Technologies and more to do with the discount to its book value in my view.
Happy Investing.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com