Tata Motors DVR -- DVR discount nearing its worst ever level:: Prabhudas Lilladher,

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􀂄 Tata Motors DVR discount nearing its worst ever level: The average discount
for the DVR to the Tata Motors’ ordinary share was 32.8% since inception. The
average discount for the DVR share over the last 18 months has been 36.4%. At
the CMP, the DVR is trading at a 46% discount to Tata Motors’ ordinary share,
nearing its worst ever level of 49.4% in Feb’11. We believe at the current levels
the probability of the discount narrowing is higher.
􀂄 Over 4% dividend yield attractive: DVR is trading at a valuation of 3.2x FY13E
EPS and 4.8x FY13E adjusted EPS (adjusted for R&D being expensed rather than
capitalized). At the CMP, the dividend yield stands at an attractive 4.2%.
􀂄 Risk: Reward favourable: Our base case Target Price (TP) for ordinary Tata
Motors stands at Rs1,163. Assuming a 42% discount, the derived TP for Tata
Motors DVR stands at Rs675, an upside potential of 26.8%. Assuming the
current 46% discount continues, the derived value for DVR would stand at
Rs628, an upside potential of 18.0%.
􀂄 Higher discount could be on account of dilution fears: Globally, the discount
widens due to dilution fears or corporate governance issues. In our recent
interaction, Tata Motors management hinted towards converting the FCCBs
maturing in July 2012 into DVRs. This could lead to an increase in supply of DVRs
as compared to the ordinary shares resulting in higher dilution.
􀂄 We recommend Accumulate on Tata Motor DVR: The DVR has corrected 26.3%
in the last 3 months compared to a 22.0% correction in the Tata Motors stock.
We believe the current price has discounted all the negatives and the risk:
reward has turned favourable. We recommend Accumulate on Tata Motors DVR
stock.