Thursday, June 12, 2014


I have been pointing out for last one month about Tata Motors DVR. It’s been outperforming almost on a daily basis. In fact, just take a look at these stunning numbers

This year, the Tata Motors DVR is up 55% while the stock is up a relatively sedate 20%. Even this month, the DVR has rallied nearly 18% vs 8% for the normal stock. Now keep in mind, both these stocks are available in derivatives and hence any pair trade would give you much more outperformance than this 55%:20% due to the leverage factor.

And what’s the result of this outperformance? Well, when the DVR was launched, it had a discount of 10%. Over the period, the discount kept widening and in fact reached 55-60%. Now with this outperformance of DVR, the discount is down to 32%. Can this trim further and what is the reason that DVR has caught market’s fancy?

The trigger perhaps was a bit global in nature. Google’s DVR trades at par with the stock and others like Viacom trade at maximum 5-10% discount. But more importantly, when Google announced a share split and that resulted in Google DVR, the S&P had to do something unprecedented. It had to include both Google (GOOG) and Google DVR (GOOGL) on the benchmark index to fully capture Google’s market cap. So S&P 500 now has 501 stocks but is still called S&P 500.

Now can the same logic be applied in India? Picture this – Tata Motors has free float market cap of Rs 85,000 cr and the DVR has free float market cap of Rs 15,000 cr. Now Rs 15,000 cr is not big enough to make it to the index but what if it reaches over Rs 20,000 cr? That’s a question worth asking. I would still say the chances of Tata Motors DVR being part of index is very low but then you never know in this market.

But let me add a word of caution here: While logic says the discount should narrow further, you must not lose sight of the fact that its vulnerable to any market correction because of its outperformance. But all things being equal, it won’t surprise me if the discount trims further to around 15-20%


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