Will this Little-Known Tata Company Trap Retail Investors? 

Hello everyone. Rahul Shah here, trying to make investing accessible and profitable for the average investor.

Shareholders in Tata Investment Corp must be a happy lot.

The stock is up a good 33% in the last one week alone whereas the gains over the last 3 months and the last one year stand at 75% and 83% respectively.

This is almost double the returns earned by the BSE Small cap index and quite good to be honest.

When I look up on the internet for the possible reason behind the rise, there's nothing significant that shows up.

On closer inspection, I came across an article on Bloomberg that attributes the sudden spurt in the stock price to the upcoming IPO of Tata Technologies. In other words, since Tata Investment Corp owns shares in Tata Motors and since Tata Motors owns 75% shares in Tata Technologies, the share price of Tata Investment is going up.

However, the byline below the title of the article itself puts you off.

It says that Tata Investment Corp owns just 0.33% stake in Tata Motors, which owns 75% in Tata Technologies as I just mentioned.

Surprisingly, the article is silent on whether the meteoric rise in the company's share price due to the IPO of Tata Tech is justified. The onus therefore falls on us.

Let's do some back of the envelope calculation to see whether this is indeed true.

Going through the annual report of Tata Investment Corp, I found out that the company owns 11 m shares in Tata Motors, which indeed amounts to 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 Rs 500 per share. This results into a listing price of Rs 850 per share.

Since Tata Motors holds 303 m shares of Tata Technologies, the total valuation of Tata Motors' stake in Tata Technologies at a listing price of Rs 850 per share, comes to close to Rs 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 as discussed earlier. This means that its share in the Rs 260 bn worth of value unlocking for Tata Motors would also be 0.3% i.e. Rs 0.78 bn or Rs 780 m.

Now, Tata Investment Corp has 5.1 m shares outstanding and therefore, the value unlocking for Tata Investment Corp of Rs 780 m translates into a per share value of just Rs 15 per share or thereabouts.

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 Rs 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 i.e. it has gone up by more than Rs 2,000 per share.

I hope you are getting the discrepancy. An IPO that's likely to add just Rs 15 per share to the overall market value of Tata Investment Corp, is being held responsible for the nearly Rs 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 Rs 1,100, which is huge and still can't be attributed to the Tata Technologies IPO.

I 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 i.e. 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 I know this? This information is given in the company's annual report.

Every year, it devotes a page for 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 Rs 3,835 per share. And as recently as September, the company's share price was in the region of Rs 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.

And by the time the September quarter results were announced, the company's book value per share based on current market value, had touched the Rs 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.

Now, I 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.

While some investors like to keep this discount as high as 50%, there are others who are ok 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 this discount as per your style and philosophy and invest accordingly. However, you should note that the higher the multiple you pay, the lower your long-term returns are.

So, pay only that multiple where you are confident that you can earn at least 18%-20% per annum over a 3-5 year perspective.

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.