Tata Motors VR

January 2012 1

Tata Motors DVR Jan 16 2012 Analyst Report

Tata Motors is a TATA Group subsidiary, with Tata Sons holding about 35% of the company. Tata Motors is amongst India’s largest car manufacturers. It also owns UK based Jaguar – Land Rover, which it bought from Ford in 2008. It manufactures a wide range of heavy and light commercial vehicles, ranging from the Tata Nano, the worlds cheapest car to hi – end vehicles under their Jaguar and Land Rover luxury brands.

Investment Rationale

JLR has been performing very well over the past few years with impressive growth in sales and profits. Considering that JLR contributes less than half of turnover, but over 80% of profits to Tata Motors, this augurs very well for the future performance of Tata Motors stock. Tata Motors domestic operations are profitable as well.

JLR is hiring staff, increasing investments in research and development, as well as adding manufacturing capacities. They are planning a slew of new launches, with over 50 new models in the pipeline due till 2015. We expect JLR to drive profitability and growth for Tata Motors over the next few years.

Valuation

With a TTM EPS of Rs 27 per share, and dividend of Rs 4.1 per share, the DVR share is quoting at very attractive valuations with a TTM P/E of 3.75x and a dividend yeild of 4%.

CMP DVR shares Recommendation

109.65 Buy

CMP Tata Motor shares Recommendation

217.40 Buy / Switch to DVR shares

Other - 26.05%

Free Float (%) : 6.72%

Promoters - 35.04%

FII - 24.14%

DII 14.77%

Shareholding Pattern – Tata Motors

Face Value (INR) 2

Book Value (INR) 63.05

52 -week range (INR) 260.74/137.55

M cap (INR M) 627876.9

3-mnth Avg. Daily Vol. (Mn) 1.97

Shares Outstanding Equity (Mn) 634.61

BSE NSE BLOOMBERG REUTERS

500570 TATAMOTORS TTMT TAMO.NS

Market Data Tata Motors

DII - 46.61%

Other - 16.02%

Free Float (%) 6.72%

Promoters - 9.01%

FII - 28.27%

Shareholding Pattern – Tata Motors DVR

Tata Motors VR

January 2012 2

Tata Motors DVR Jan 16 2012 Analyst Report

Tata Motors Differential Voting Rights (DVR) share

In 2008, Tata Motors issued a class of share called Tata Motors DVR shares. They issued 64.1 crore shares, through a rights issue to raise funds for the JLR acquisition. The shares are identical to ordinary shares of Tata Motors, except that they have 1/10th of voting rights compared to ordinary shares, and they give an additional 5% dividend on face value, as compared to ordinary shares. In all other aspects they are counted as ordinary shares. These DVRs’ listed on the stock exchanges in November 2008.

Please refer to Annexure A for more details on DVR shares and their history in India.

DVR Investment Rationale

Strong JLR Performance

JLR recently hired over 1500 new staff for its 3 UK plants, and plans to increase total headcount from 17,000 to 20,000 by 2013, including an additional 1,000 engineers. The company has earmarked an annual investment of 1 billion pounds for the next 5 years towards product development and research and is planning an investment of an additional 55 million pounds to set up an engine plant in the UK.

The company is registering excellent growth in developing markets, with China and Russia clocking 79% and 60% growth respectively, in volumes in 2010-11. In the UK, JLR’s largest market volumes grew by 8%. China now is JLR’s second largest market after the UK, with the USA in third place. In response to the strong demand coming from China, JLR is in process of identifying local partners to set up a manufacturing plant there.

JLR’s new launches in 2011, the Jaguar XF and in particular the Land Rover Evoque have received rave reviews and responses from customers and critics alike. The Evoque sold out worldwide for 2 quarters after its launch in September 2011, and the XF is generating impressive sales.

Attractive Valuation:

With TTM EPS of RS 27 per share, and dividend of Rs 4.1 per DVR share (Rs 4 per ordinary share), the DVR is available at very attractive valuations with a TTM P/E of 3.75 x and a dividend yield of 4%.

JLR posted an annual profit of 1.1 billion pounds in FY 2010-11, and analysts estimate FY12 profit for JLR at 1.5 billion pounds. Assigning a P/E ratio of 10x to JLR, we arrive at a market cap of Rs 1, 20,000 crore for JLR alone, much higher than the M-Cap of Tata Motors, Rs 60,000 crore.

Assuming Tata Motors matches Bloomberg estimates of EPS Rs 27.8 per share for FY 11-12, the DVR is available at just over 3x P/E, FY 11-12.

Tata Motors VR

January 2012 3

Tata Motors DVR Jan 16 2012 Analyst Report

DVR discount to shares at historic high level: Current discount of DVR shares compared to ordinary Tata Motors shares is approximately 50%, close to an all time high discount for the share. This discount is well above the near 30% average that has prevailed since inception.

Globally, the prevailing discount ratio for similar securities ranges between 10-20%.

Performance of Tata Motors DVR Vs Tata Motors (Last Six Months)

Tata Motors DVR vs. Tata Motors

Performance of Tata Motors DVR versus Sensex & Tata Motors, Source ‐ Bloomberg (Green – Sensex, Red ‐Tata Motors, Blue – Tata Motors DVR)

Tata Motors VR

January 2012 4

Tata Motors DVR Jan 16 2012 Analyst Report

Sharp reduction in promoter holding: The institutional holding in the DVR has been on a steady rise over last one year with the FII and DII holdings increased from 35% in Q4 FY10 to over 76% Q2 FY12. Promoter holding has come down from 52.9% to 9% in the same period. This may be because promoters prefer holding shares with full voting rights, thus they are diluting their holding of DVR shares. As the promoters are likely to sell the balance DVR shares in the near future, we expect the supply pressure on DVR’s to drastically reduce, and this should result in narrowing down of the discount on DVR.

Improvement in Float – With a reduction in promoter holding the DVR float has improved. Generally DVR with higher float have lower discount, or even premium at times, compared to ordinary shares.

Companies in India with DVR:

Pantaloon DVR is identical in structure to Tata Motors. Gujarat NRE Coke does not offer any additional dividend, and its voting rights are 1/100th of a regular equity share. However the discount on Tata Motors is larger compared to the two stocks.

Recommendation

Tata Motors has been performing admirably since recovering from the 2008 slowdown, and its future prospects based on JLRs’ performance are looking positive. Tata Motors today is one of the key index constituents, and among the first stocks that foreign investors subscribe to, to get exposure in India. With improving investors sentiments for India we believe that Tata motors should see lot higher interest than most other index stocks.

Also, since promoters hold less than 10% of the DVRs outstanding, it can be assumed that supply pressure would considerably ease for DVRs in the near future. Hence we expect the discount between the DVR and ordinary share to narrow in the near future.

Therefore for investors with a short and medium term view, we recommend investments in Tata Motors DVR share. We also suggest existing Tata Motors shareholders to shift to Tata Motors DVR for higher dividend and capital appreciation on back of expected narrowing of unwarranted steep discount on DVR, and stellar performance by Tata Motors.

Company Share Price DVR Price Discount

Pantaloon 146.2 100 32%

Gujarat NRE Coke 19.75 13.15 33%

Tata Motors 203.5 102.55 50%

Tata Motors VR

January 2012 5

Tata Motors DVR Jan 16 2012 Analyst Report

ANNEXURE A

What is DVR?

DVR or “Dual Class”, shares render the holder differential rights with regards to voting rights, (can be more or less voting right) compared to Ordinary shareholders of the company. DVRs can result in shares that have superior/ inferior voting rights, offered in lieu of lower/ higher dividends and maybe offered at a premium/ discount. Apart from the voting rights and dividend, DVR shares are like normal equity shares in all aspects.

Normally, a company issues DVRs to raise more capital without diluting its ownership structure. It is beneficial for the passive investors who are not interested in company management and look for higher dividends and discounts.

In general, due to lack of investor awareness DVR securities tend to be relatively illiquid, and this amplifies the impact of business cycle on DVR prices. Generally, during the business up-cycle the discount on DVR price tends to reduce, while during the business down-cycle the discount increases. Also, not all institutions are keen to participate in such issues due to lack of well-established price discovery mechanism, and possibly due to restrictive self-imposed clauses, which prohibit investment in such instruments. In extreme cases, DVR with superior voting rights can make management excessively powerful and insulate managers from accountability.

Target Owners of DVR

DVR allows bringing in a class of investors who are only interested in the economic benefits i.e. dividends and not in participating in the operations and management of a company. DVRs are generally subscribed to by investors who do not intend to participate in the management and operation of a company by voting in the resolutions put forth before them, while at the same time being interested in the economic benefits attaching to the shares.

History of DVR in India

In India in 1991, an “Expert study on establishment of New Stock Exchange” under chairmanship of Mr. M. J. Phewani proposed that dividend paying companies with proper track record of dividend payment could issue shares without right to vote. The Issue of DVRs in India was allowed only since 2001.

Further due to instances of misuse of DVR with superior voting rights by the promoters and to prevent further misuse of the same by the management looking to get more control on the company to the deterrent of the minority stakeholders, on July 21, 2009 SEBI addressed a letter to all stock exchanges which prohibited issue of DVRs with superior rights as to dividend or voting.

Post this ruling, new issue of the likes of Tata Motors or Pantaloons with higher dividends and lower voting rights is not possible. However, as these issues by Tata Motors were made before the amendments, SEBI has allowed issue of DVRs as bonus shares or rights issue to existing DVR holders of Tata Motors. The above informal guidance to Tata Motors (issued in April 2010) also allowed it to issue fresh DVRs with same terms by way of FPO issue, preferential allotment and QIPs, and issue of ESOPs which are convertible into DVRs.

Tata Motors DVR. Analyst Report

January 2012

Disclaimer

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