Markets

Investment focus - Tata Investment Corp: Buy

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Fresh investments can be considered in the stock of Tata Investment Corp, which predominantly has investments in Tata group companies.

The stock is trading at a steep discount to its net asset value (NAV), which is based on the market value for quoted investments and book value for unquoted investments.

As of September 30, the discount of the stock price to its net asset value was 44 per cent – much higher than the typical holding company discount of between 10-30 per cent. This discount is widest since June 2009 when the markets were beginning to revive. Higher discount of stock price to NAV limits the stock’s downside and offers potential for upside.

Since March 2008, while the Tata Investment stock price is down 7 per cent, its net asset value is up 8 per cent in absolute terms.

During this time, the company cumulatively paid dividends of Rs 84 a share The company’s current dividend yield is 3.5 per cent and including the special dividend, it goes up to 4.6 per cent. Its earnings were subdued last year as there were a few profitable sale of investments but in the current rally, more profits from investment sales can be expected.

This may further increase the already healthy dividend payout.

Holdings: As of March 2012, listed equity investments as a percentage of total investments was 60 per cent against 72 per cent a year ago. The company’s shift to debt due to weak equity performance suggests a proactive investment strategy. With the market revival, the proportion of equity is expected to rise.

The top 10 holdings of Tata Investment were in Tata group companies. This dynamic may not change given the buy-and-hold strategy of the company for Tata group stocks.

Titan Industries, Tata Chemicals, Tata Global Beverages and Tata Motors (including Tata Motors DVR) are the top holdings for the company. Some of the top holding stocks have run up since September increasing the gap between net asset value and the stock price.

The stock portfolio of Tata group companies has a good mix of consumption and investment plays which should support Tata Investment’s NAV across cycles. The remaining listed holdings (estimated in excess of Rs 1100 crore) are mostly in large-cap stocks. Apart from listed companies and debt holdings, the stock has unquoted equity investments in Tata Sons, Tata Autocomp, National Stock Exchange, Tata Mutual Fund, Tata Capital and CARE ratings. A few of these investments do provide good value unlocking opportunities.

Holding and investment companies usually lag their underlying investments in a rally. The stock is a defensive bet and might not run up as much as the underlying stocks for prolonged periods of time. Therefore, investors should have patience and hold the stock with a horizon of at least two years.

Published on November 10, 2012

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