Tata Motors Limited. Eliminating A Discrepancy and Driving Shareholder Value. June 10, 2014

Transcription

1 Tata Motors Limited Eliminating A Discrepancy and Driving Shareholder Value June 10, 2014

2 Disclaimer THE ANALYSES PROVIDED MAY INCLUDE CERTAIN STATEMENTS, ESTIMATES AND PROJECTIONS PREPARED WITH RESPECT TO, AMONG OTHER THINGS, THE HISTORICAL AND ANTICIPATED OPERATING PERFORMANCE OF TATA MOTORS LIMITED (THE COMPANY ). SUCH STATEMENTS, ESTIMATES, AND PROJECTIONS REFLECT VARIOUS ASSUMPTIONS BY KNIGHT ASSETS CONCERNING ANTICIPATED RESULTS THAT ARE INHERENTLY SUBJECT TO SIGNIFICANT ECONOMIC, COMPETITIVE, AND OTHER UNCERTAINTIES AND CONTINGENCIES AND HAVE BEEN INCLUDED SOLELY FOR ILLUSTRATIVE PURPOSES. NO REPRESENTATIONS, EXPRESS OR IMPLIED, ARE MADE AS TO THE ACCURACY OR COMPLETENESS OF SUCH STATEMENTS, ESTIMATES OR PROJECTIONS OR WITH RESPECT TO ANY OTHER MATERIALS HEREIN. ACTUAL RESULTS MAY VARY MATERIALLY FROM THE ESTIMATES AND PROJECTED RESULTS CONTAINED HEREIN. NO INFORMATION IS CONTAINED HEREIN WITH RESPECT TO RISKS OR CONFLICTS OF INTEREST THAT MAY BE SIGNIFICANT. YOU SHOULD CONDUCT YOUR OWN ANALYSIS THEREOF. THIS PRESENTATION INCLUDES INFORMATION BASED ON DATA FOUND IN COMPANY FILINGS WITH THEIR RELEVANT REGULATORS, INDEPENDENT INDUSTRY PUBLICATIONS AND OTHER SOURCES. ALTHOUGH KNIGHT ASSETS BELIEVES THAT THE DATA ARE RELIABLE, WE HAVE NOT SOUGHT, NOR HAVE WE RECEIVED, PERMISSION FROM ANY THIRD-PARTY TO INCLUDE THEIR INFORMATION IN THIS PRESENTATION. MANY OF THE STATEMENTS IN THIS PRESENTATION REFLECT OUR OWN SUBJECTIVE BELIEF. KNIGHT ASSETS ADVISES FUNDS THAT ARE IN THE BUSINESS OF TRADING - BUYING AND SELLING - PUBLIC SECURITIES. WE CURRENTLY HOLD A SUBSTANTIAL AMOUNT OF SECURITIES OF COMMON STOCK OF THE COMPANY. WE MAY FROM TIME TO TIME SELL ALL OR A PORTION OF THE SECURITIES IN OPEN MARKET TRANSACTIONS, BUY ADDITIONAL SECURITIES IN THE OPEN MARKET, OR TRADE IN OPTIONS, PUTS, CALLS OR OTHER DERIVATIVE INSTRUMENTS RELATING TO SUCH SECURITIES. KNIGHT ASSETS ALSO RESERVES THE RIGHT TO TAKE ANY ACTIONS WITH RESPECT TO ITS INVESTMENT IN THE ISSUER AS IT MAY DEEM APPROPRIATE, INCLUDING, BUT NOT LIMITED TO, COMMUNICATING WITH MANAGEMENT OF THE COMPANY, THE BOARD OF DIRECTORS OF THE COMPANY, AND OTHER INVESTORS. THIS PRESENTATION SHOULD NOT BE CONSIDERED AS INVESTMENT ADVICE OR A RECOMMENDATION TO BUY, SELL OR HOLD ANY INVESTMENT. NEITHER THESE MATERIALS NOR ANYTHING CONTAINED HEREIN IS INTENDED TO BE, NOR SHOULD IT BE CONSTRUED OR USED AS, INVESTMENT, TAX, LEGAL, OR FINANCIAL ADVICE, AN OPINION OF THE APPROPRIATENESS OF ANY SECURITY OR INVESTMENT, OR AN OFFER, OR THE SOLICITATION OF ANY OFFER, TO BUY OR SELL ANY SECURITY OR INVESTMENT. THE INFORMATION AND OPINIONS PROVIDED HEREIN SHOULD NOT BE TAKEN AS SPECIFIC ADVICE ON THE MERITS OF ANY INVESTMENT DECISION. INVESTORS SHOULD MAKE THEIR OWN DECISIONS REGARDING THE COMPANY AND ITS PROSPECTS BASED ON SUCH INVESTORS OWN REVIEW OF PUBLICLY AVAILABLE INFORMATION AND SHOULD NOT RELY ON THE INFORMATION CONTAINED HEREIN. ALL REGISTERED OR UNREGISTERED SERVICE MARKS, TRADEMARKS AND TRADE NAMES REFERRED TO IN THIS PRESENTATION ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS, AND KNIGHT ASSETS USE HEREIN DOES NOT IMPLY AN AFFILIATION WITH, OR ENDORSEMENT BY, THE OWNERS OF THESE SERVICE MARKS, TRADEMARKS AND TRADE NAMES. NEITHER KNIGHT ASSETS & CO. LLP ( KNIGHT ASSETS ), NOR ANY OF ITS AFFILIATES ACCEPTS ANY LIABILITY WHATSOEVER FOR ANY DIRECT OR CONSEQUENTIAL LOSS HOWSOEVER ARISING, DIRECTLY OR INDIRECTLY, FROM ANY USE OF THE INFORMATION CONTAINED HEREIN. 2

3 A Premium Global Auto Manufacturer The Company has transformed itself into a global automobile company, with the Jaguar and Land Rover brands accounting for nearly 85% of revenues. 3

4 A Tale of Two Managements Ford spent US$ 50 Billion * over two decades of its ownership of Jaguar without ever turning an annual profit Tata Motors purchased Jaguar Land Rover from Ford in 2008, for US$ 2.3 Billion, and in a mere 5 years makes an annual profit equal to the acquisition price *based on analyst estimates 4

5 Delivering on a Successful Strategy Product portfolio receiving highest praise from commentators and customers alike EBITDA* & EBITDA margin (US$ mm) 9% 16% 15% 8,033 6,336 1,745 FY 2010 FY 2014 FY 2016e Jaguar Land Rover Volumes (Units) It is an exceptional sports car, sharp and invigorating and full of life and charisma Top Gear Jaguar F-Type review 193, , ,792 *Consolidated Source: Company, Bloomberg, Analysts Estimates FY 2010 FY 2014 FY 2016e 5

6 A Discrepancy 36% Discount A Shares trade at an irrational discount to the Ordinary Shares. As of June 10,

7 Warren Buffett s Perspective From time to time, a different supply-demand situation will prevail and the B will sell at some discount. In my opinion, again, when the B is at a discount of more than say, 1%, it offers a better buy than the A. Shareholder memo regarding Berkshire Hathaway s Class A and Class B stock, 02 February 1999* *Berkshire Hathaway Class A stock has 6.67x the voting rights of Class B stock 7

8 Possible Explanations for the Discount 1 First company to issue dual class shares and is the only listed Indian company of relevance 2 A lack of balance in the economic rights and liquidity between the two share classes 3 Market Participants lack of experience and understanding in investing in such securities 8

9 1 Only Dual Class Company Only Relevant Company Given the immaculate corporate governance standards of Tata Motors, the discount is not comparable to that of other Indian companies with such dual class share structures. 9

10 2 Economic Rights and Liquidity Imbalance Of Economic Rights and Liquidity The A Shares represent 15% of the underlying economic value of the Company and unlike the Ordinary Shares have no NYSE Listing. 10

11 3 Efficient Market Pricing of the Spread ±3% Spread Tata Motors dual class shares should trade at similar spreads to that of other prominent global companies. 11

12 Comparable Company Share Class Spreads Company Market Cap (US$ Billion) Current Spread Between Share Classes * 1 year Average 3 year Average 5 year Average 21 st Century Fox % -1.26% 0.64% 5.10% Liberty Interactive % -0.18% -0.57% -0.41% Viacom % 1.24% 1.74% 2.26% Molson Coors Brewing Constellation Brands Berkshire Hathaway % 0.08% 0.41% -0.22% % -0.03% 0.02% -0.02% % -0.96% -0.93% -0.80% Volvo % -0.03% 0.05% -0.89% Tata Motors % 48.87% 45.50% 40.40% Source: Bloomberg, Knight Assets, as of June 10, 2014 *A negative number implies that the junior voting stock trades at a premium to the super voting stock. 12

13 Key Attributes of Comparable Companies Pedigree and reputation of the management and/or the large shareholder is pre-eminent Global nature of the company s underlying business and its products A track record of creating long-term value for shareholders Attractive fundamental business value and prospects for future growth 13

14 1 Pre-eminent Reputation 140 Years The Tata name has been respected for more than a century for its adherence to strong values, business ethics and shareholder returns. 14

15 2 A Global Business 90% Value The Company s value is primarily attributable to the iconic Jaguar and Land Rover brands and their related earnings. 15

16 3 Focused on Creating Long-Term Value JLR Division Bought Jaguar Land Rover (JLR) in the depths of the financial crisis for the long-term benefit of the Company and shareholders. 16

17 4 Attractive Fundamentals Model Age * 3.3 Years The Company is at a secular growth inflection point 4 new model releases over the next two years. A high correlation between sales volume, product cycle strength and lowest model age should translate into attractive returns for shareholders. *FY 2016e: Lowest amongst its peer group Mercedes, BMW and Audi. 17

18 4 A Growing Business Revenues * (US$ mm) 34,692 39,440 19,531 FY 2010 FY 2012 FY 2014 EBITDA * (US$ mm) 4,672 6,336 1,745 FY 2010 FY 2012 FY 2014 *Consolidated Source: Company, Bloomberg, Analysts Estimates 18

19 4 Significant Gains From Deleveraging Market Cap (US$ mm) 9,186 17,146 23,672 FY 2010 FY 2012 Current 4.4x 7, x 0.4x 4,633 2,617 Net Debt / EBITDA (x) Net Debt * (US$ mm) FY 2010 FY 2012 FY 2014 *Consolidated Source: Company, Bloomberg, Analysts Estimates, as of June 10,

20 4 On a Solid Growth Trajectory FY 2010 FY 2014 FY 2016e JLR Volumes 193, , ,792 JLR EBITDA Margin 5.4% 17.5% 16.5% JLR Product Range Non-existent product line Significant operational inefficiencies Lack of legacy R&D investment New Models Jaguar: XJ New model releases over the past 2 years went on a hyper sales drive - Evoque New Models Jaguar: XF, XF Sportbrake, F-Type LR: Evoque, Range Rover, Range Rover Sport A new model released every 6 months for the past 2 years Production expands ~50% New Models Jaguar: F-Type Coupe, Small Jag, XF, C-X17 LR: Discovery, Defender JLR % Of Total Revenues 53.3% 82.2% 89.1% JLR % Of Total EBITDA 33.1% 89.5% 94.6% Consolidated Leverage* 5.27x 1.96x 1.48x Source: Company, Knight Assets, Bloomberg, Various Analysts Estimates *Total Debt to EBITDA 20

21 Significantly Undervalued 2014E P/E E EPS CAGR PEG 2016E PBV 2016E ROE PBV / ROE Tata Motors* 8.9x 12.2% 0.7x 1.3x 19.9% 6.6x BMW 10.6x 5.1% 2.1x 1.3x 13.8% 9.4x Daimler 11.6x 10.8% 1.1x 1.3x 14.8% 8.8x Tata Motors exhibits stronger forecast EPS growth and ROE and yet trades at a discount to its peers *Where applicable, metrics are based on the Ordinary shares. The A shares would have lower metrics due to the discount. Figures and estimates have been calendarized Source: Company, S&P CapIQ, Analysts Estimates, as of June 10,

22 A Perspective on the Spread 2010 A Complete Transformation 2014 A Premium Auto Manufacturer A long track-record of poor financial performance by JLR, under Ford s ownership, and Tata Motors lack of experience in the premium auto segment made investors sceptical about the company s future prospects. Conservatively Capitalised Balance Sheet The JLR deal, a slowdown in India and the significant capex required to create a refreshed product line continued to stress the balance sheet. A Profitable and Prominent Global Business JLR, along with its razor thin margins at the time, only contributed to approximately a third of the EBITDA and half the revenues. Leading Premium Products Across the Value Chain There has been an intense focus on R&D in order to create a premium product line up covering the entire value chain since the acquisition. New model launches will reduce JLR s model age by 40% and expand its capacity by over 50% over the next two years. The Spread Between the Share Classes is Irrational Today 22

23 Catalysts and Solutions for Convergence In all stakeholders interests for the A Shares to be priced efficiently The Tata Group and management are unenthused about this discrepancy in the capital structure All possible solutions should be explored Corporate actions Diversifying the shareholder base further internationally Evaluating other potential sources of investor demand A Significant Opportunity to Enhance the Shareholder Friendly Stance of the Company with Investors Globally 23

24 Solutions for Shareholder Value Creation 1 2 Balancing the Economic Rights through a Corporate Action Diversifying the Investor Base Globally Convergence P/E Expansion Instinctive Association of the Key Brands and the Company Evaluating Other Specific Sources of Investor Demand

25 Solutions Evaluation and Impact A Share Bonus NYSE Listing Company Name Index Inclusion Irrationality Elimination Investor Base Diversification? P/E Multiple Expansion Expected Time to Implement Days* Days* Management Dependent Requires Engagement Summary Provides immediate balance in economic rights (legal limit) Makes the A Shares a relevant currency Tata Group can increase their voting rights gradually U.S. markets and investors have had dual class shares for two decades Does not require any material filings or procedures Most dynamic and liquid markets Reflect the two other substantial brands Would have an unknown positive effect on P/Es Would increase investor base by an unknown factor The Company s bankers will engage with index inclusion committee Ideally should be done post bonus announcement Additional demand from investors *Post corporate action(s) announcement and requisite shareholder approval(s) to amend the Articles of the Company 25

26 Our Due Diligence U.S. NYSE Listing U.S. SEC Regulatory India Legal Global Investment Bank Validation India Proxy Firms Current Shareholders and Prospective Investors 26

27 Appendix 1 Case Studies

28 Google Inc. Created additional share class by way of a stock dividend (aka bonus) - Paid dividend of 1 new Class C share for each outstanding share of Class A and Class B New shares known as Class C and provides management tactical and strategic flexibility - Over time, Class C share will become the primary equity trading line S&P Dow Jones Indices will add the Class C stock to the S&P 100 and S&P 500 indices - Constituents in those indices rose to 101 and 501 Google Inc. Par Value Shares Out Price Voting Right Market Cap. (US$ Billion) Class A ,844, Class B ,800, Class C ,644,

29 Fiat S.p.A. Similar turnaround of Chrysler has made Fiat consider several strategic changes Changed the name of the company from Fiat SpA to Fiat Chrysler Automobiles N.V. In the process of changing its primary listing jurisdiction from Italy to the U.S. Analysts estimate that the value of the company will increase substantially post the U.S. listing due to a P/E expansion 29

30 Infosys Limited US is the key market for Infosys Infosys wanted to raise its brand equity and attract more US customers Being listed on the US markets was considered as one of the key steps to increase brand awareness in the US Infosys got listed on NASDAQ in 1999 Subsequently, they did 3 sponsored ADR offerings in the year 2003, 2005 and 2006 In 2006, Infosys did their 3 rd Sponsored ADR with an aim to increase ADR free float and get included in Nasdaq-100 index Subsequent to the ADR offering, Infosys got added to the Nasdaq-100 index Infosys Limited Shares Out Price (US$) Voting Right Market Cap. (US$ Billion) Ordinary Shares 481,765, ADRs 92,470,

31 Sponsored ADR Rumours In 2010, several newspaper articles suggested that the Company was considering a sponsored ADR offering for the A Shares This caused a sharp compression in the spread Spread Compression on Sponsored ADR Rumours /01/ /04/ /07/2010 Source: Bloomberg, Knight Assets 31

32 Access a Latent Pool of Capital Most of the ADR holders of Indian firms do not hold, or hold a negligible position, in the respective Indian listings Most of the Tata Motors ADR holders do not hold either the ordinary or A Shares Many asset managers which own the shares of GM and Ford currently do not own Tata Motors ADRs Listing the ADR of the A Shares in the US will help the Company tap a latent pool of capital for the A Shares in addition to several non-equity focused asset managers who trade across the capital structure and are familiar with trading dual class share structures 32

33 ADR v/s Ordinary: Shareholders Most of the ADR holders of Indian firms do not hold / hold negligible position in their respective Indian listings Infosys HDFC Bank US$mn Market Value of Holding Shareholder ADR Ord JPMORGAN CHASE ACADIAN AM UBS AG SPRUCEGROVE IM BLACKROCK COMMONWEALTH BANK OF AUSTRALIA GENESIS ASSET MANAGERS SCHRODERS PLC ARROWSTREET CAP LIMITED PARTNER INVESCO LTD FRANKLIN RESOURCES ABERDEEN 108 1,308 FRANK RUSSELL TRUST COMPANY 98 2 WELLS FARGO & COMPANY CAPITAL GROUP COMPANIES INC HSBC HOLDINGS PLC 84 5 FISHER INVESTMENTS INC 82 - STATE STREET CORP 76 2 TRILOGY GLOBAL ADVISORS LLC 74 - DIMENSIONAL FUND ADVISORS LP PARAMETRIC PORTFOLIO ASSOCIATES 72 - MARTIN CURRIE LIMITED 64 6 POLARIS CAPITAL MANAGEMENT 59 - MORGAN STANLEY AQR CAPITAL MANAGEMENT LLC 55 - US$mn Market Value of Holding Shareholder ADR Ord JPMORGAN CHASE & CO VONTOBEL HOLDING AG CAPITAL GROUP COMPANIES INC 422 1,446 FMR LLC LAZARD LTD FISHER INVESTMENTS INC MASSACHUSETTS FINANCIAL SERVICES SCHRODERS PLC VANGUARD GROUP INC HARDING LOEVNER LP BLACKROCK UNIVERSAL INVESTMENT CO HARRIS TRUST & SAVINGS BANK WASATCH ADVISORS INC 87 - THORNBURG INVESTMENT MGMT INC 82 - INDUS CAPITAL PARTNERS LLC 81 - WELLS FARGO & COMPANY 74 7 UBS AG FIL LIMITED MORGAN STANLEY HANSBERGER GLOBAL INVESTORS INC 58 - T ROWE PRICE GROUP INC CREDIT SUISSE AG 55 1 AMP LTD 52 - DEUTSCHE BANK AG

34 ADR v/s Ordinary: Shareholders (Cont d) There are different set of shareholders for ADR v/s Ordinary Shares of Indian firms Sesa Sterlite Dr Reddys US$mn Market Value of Holding Shareholder ADR Ord HSBC HOLDINGS PLC 78 0 BLACKROCK DIMENSIONAL FUND ADVISORS LP LSV ASSET MANAGEMENT 42 - SEGANTII CAPITAL MANAGEMENT LTD 18 - MORGAN STANLEY 14 - STATE STREET CORP 13 1 BANK OF NEW YORK MELLON CORP NATIXIS SA 12 1 NEWGATE CAPITAL MANAGEMENT LLC 9 - GRANTHAM MAYO VAN OTTERLOO & CO 9 32 VAN ECK ASSOCIATES CORP 7 - JANE STREET HOLDING LLC 7 - WASHINGTON STATE INVESTMENT BOAR 6 - CANADA PENSION PLAN INVEST 5 - PRUDENTIAL FINANCIAL INC 5 1 MANULIFE FINANCIAL CORP 5 0 SCEPTER HOLDINGS INC 4 - APERIO GROUP LLC 4 - GRATIA CAPITAL LLC 4 - LEE MUNDER CAPITAL GROUP LLC 4 - JANE STREET GROUP LLC 3 - COMMONWEALTH BANK OF AUSTR 3 - NORTHERN TRUST CORPORATION 3 2 UBI PRAMERICA SGR 3 - US$mn Market Value of Holding Shareholder ADR Ord BLACKROCK FISHER INVESTMENTS INC 91 - COMMONWEALTH BANK OF AUSTR 91 1,032 FIL LIMITED VANGUARD GROUP INC SCHRODERS PLC ACADIAN ASSET MANAGEMENT LLC 33 7 JPMORGAN CHASE & CO PRINCIPAL FINANCIAL GROUP INC CREDIT SUISSE AG 23 - PRUDENTIAL FINANCIAL INC 22 1 ARROWSTREET CAP LIMITED PARTNER 21 - SECTORAL ASSET MANAGEMENT 17 - CAUSEWAY CAPITAL MANAGEMENT LLC 17 6 MORGAN STANLEY 15 4 UBS AG 14 2 AQR CAPITAL MANAGEMENT LLC 14 - TRILOGY GLOBAL ADVISORS LLC 13 - WELLINGTON MANAGEMENT CO LLP 13 0 STATE STREET CORP 13 0 DIMENSIONAL FUND ADVISORS LP 13 4 TODD ASSET MANAGEMENT LLC 12 - TEACHERS RETIREMENT SYSTEM OF KY 12 - CREDIT AGRICOLE SA 12 - GOLDMAN SACHS GROUP INC 11-34

35 ADR v/s Ordinary: Shareholders (Cont d) Most of the Tata Motors ADR holders do not hold either the Ordinary or A Shares Tata Motors US$mn Shareholder ADR Market Value of Holding Ord DVR BLACKROCK JPMORGAN CHASE & CO AMERICAN CENTURY COMPANIES INC ACADIAN ASSET MANAGEMENT LLC LAZARD LTD FRANK RUSSELL TRUST COMPANY ALLIANZ SE FISHER INVESTMENTS INC TRILOGY GLOBAL ADVISORS LLC LSV ASSET MANAGEMENT WILLIAM BLAIR & COMPANY LLC BARROW HANLEY MEWHINNEY & STRAUS CAPITAL GROWTH MANAGEMENT FIL LIMITED SCHRODERS PLC THORNBURG INVESTMENT MGMT INC PRINCIPAL FINANCIAL GROUP INC AQR CAPITAL MANAGEMENT LLC PRUDENTIAL FINANCIAL INC MANAGED ACCOUNT ADVISORS LLC BANK OF NEW YORK MELLON CORP CREDIT SUISSE AG HENDERSON GROUP PLC F&C ASSET MANAGEMENT PLC UBS AG

36 A Share Bonus Analysis No material impact to the shareholders of either class Post-Bonus Pre Bonus Post Bonus Share Class No. of Shares Economic Rights Voting Rights No. of Shares Economic Rights Voting Rights Company Share Capital Structure Ordinary Shares 2,736,713, % 98.3% 2,736,713, % 96.8% A Shares 481,966, % 1.7% 912,304, % 3.2% 3,218,680, % 100.0% 3,649,017, % % Tata Group Ordinary Shares 939,556, % 33.8% 939,556, % 33.2% A Shares 3,478, % 0.0% 129,562, % 0.5% 943,034, % 33.8% 1,069,118, % 33.7% Ordinary Shareholders Ordinary Shares 1,797,156, % 64.5% 1,797,156, % 63.5% A Shares n/a 240,279, % 0.8% 1,797,159, % 64.5% 2,037,436, % 64.4% A Shareholders Ordinary Shares n/a n/a A Shares 478,488, % 1.7% 542,462, % 1.9% 478,488, % 1.7% 542,462, % 1.9% Source: Company Filling (as of March 31, 2014), Knight Assets 36

37 Analyst Coverage Only one global auto sector analyst covers the stock Most of the Indian analysts are generalists cover various sectors No analyst coverage or mention of the A Shares in reports *Brief coverage that mentions a price target on the A Shares and that they are a better risk-reward investment and/or a price target based on the average historical discount. 37

38 Thank You Creating Shareholder Value and a Win-Win Solution for all Stakeholders