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Get Richer Today: TATA Motors Arbitrage

June 29, 2011 | About:

Here’s an idea:



1) Sell (short) 100 shares of TATA and buy 100 TATA DVRs.

You are now richer by 45,000 Rupees.

2) Wait.

3) The day you can sell the DVRs at a price roughly equal to that of the ordinary TATA shares, do so. Use the proceeds to buy TATA shares (cover your short position).

Here is how it works:



We assume the value of a security equals the present value of all future dividends. If this is in fact true, then the two shares of TATA, by definition, have and will continue to have equal value.

TATA motors makes Jaguars, Range Rovers and some other, lesser known cars.

The company’s ordinary shares currently trade at Rs 1000 or $22 in the US. TATA's DVR shares have 105% of the dividend and 10% of the voting rights. The DVRs currently trade at Rs 550.

In all other respects, the DVRs (Differential Voting Rights) are identical to the ordinary shares. It's fair to say the present value of all future dividends, for the DVRs, is by definition 5% higher. TATA has this to say about its shares.

While you wait, any dividends you need to cough up for the ordinary shares you shorted will be more than paid for by the dividends you receive for the DVRs.

If everything goes to zero and the sky comes falling… well you just saved yourself the trading cost of step No. 3; you’re still Rs 45,000 richer than you were.

All comments and questions welcome as usual.

No position, long or short.

About the author:

batbeer2
I define intrinsic value as the price I would gladly pay to own the business outright. With current management in place. For most stocks, that value is 0. As of September 2012, I'm the author of the monthly Buffett-Munger Best Bargains Newsletter. I can be reached at fvandenbroek AT gurufocus DOT com

Visit batbeer2's Website


Rating: 3.4/5 (17 votes)

Comments

go_loe
Go_loe - 3 years ago
Batbeer2, Thanks for the idea. DVR currently trades at Rs.550
batbeer2
Batbeer2 premium member - 3 years ago
Ouch.... thanks. Fixed the typo.

I had the Rs 450 difference in my head not the Rs 550 price.
go_loe
Go_loe - 3 years ago
Just curious, why dont you have a position(arbitrage) in this?
batbeer2
Batbeer2 premium member - 3 years ago
1) I don't short.... period. I do write about some short ideas here from time to time just to learn. This is of course a pair trade but I try not to break my own rules and this does involve shorting...

2) I would need a different broker for this.

I have seen some others like this one. For example, there was a big gap between Heineken ordinary and Heineken holding.... I didn't do it and of course it worked out flawlessly.

This one also reminds me of the Porsche/Volkswagen thing... oh boy were there some fireworks. You need a cool head and enough dry powder to survive the short term volatility. I could have written this particular article a while ago when the difference was Rs. 200. How would I be feeling today ?

After I've seen a dozen or so of these unfold I should have an understanding of what's important and what's not.
go_loe
Go_loe - 3 years ago
Yes, the spreads can go far more than you can tolerate!
lynchfan
Lynchfan - 3 years ago


Thanks for the article. If I had the ability to trade on the NSI I would consider it.

What are people's thoughts of an outright long position on TTM? It seems to be a potential value buy?
batbeer2
Batbeer2 premium member - 3 years ago
Yeah, TTM looks cheap by itself. I would not sleep though knowing someone else is getting a 40% discount.... envy.
go_loe
Go_loe - 3 years ago
So, you think owning DVR at these prices may be a potential value investment? On what value metrics, do you think that TTM is cheap?
batbeer2
Batbeer2 premium member - 3 years ago
@ Go_loe

I looked into it a bit and I threw it on my "too hard" pile. I can't get my head round the balance sheet.

There's a similar idea that's traded in Frankfurt and Milan. That one's a bit easier to trade and as an NCAV, clearly cheap.

FIAT industrial: http://www.gurufocus.com/news/143691/tomfoolery-in-turin--arbitrage-idea
batbeer2
Batbeer2 premium member - 3 years ago
From another thread:

>> Why don't you short? In short, my batting average isn't good enough.


Let's take the stocks I voted on in 2008: http://www.gurufocus.com/ic/space.php?uid=35024&do=vote

Back then I identified one short (CALM). Of course that stock is up. So far, the record shows I was 100% wrong on the short side.

I picked 14 "longs" of which 8 did well; this sure beats my record as a short-seller no ?

For 2009 I was sure STEC was a short.... brilliant !

I also picked AAPL as a short.... ouch !.

That record is much better than my 2008 record though ;-)

That year I picked/voted roughly 50 "longs" of which about 30 did well.

I typically start buying at a 50% discount to my estimate of IV so my portfolio fares a bit better than my batting average might suggest. In any case, it's clear my ability to correctly identify shorts is even worse than my ability to identify longs.


One thing I learnt tracking shorts is the relative importance of market risk. Many smart investors were right about Volkswagen. Nevertheless, they were killed by market risk; a short-squeeze. You couldn't just sit and wait till the volatility ended if you were short at that point.


That event put huge pressure on a pare-trade that's wasn't dissimilar to this TATA idea. It's good to know where, when and why others got killed.
batbeer2
Batbeer2 premium member - 3 years ago
Found some research on the profitability of these trades.

http://turnkeyanalyst.com/2011/03/dual-class-shares-a-first-class-strategy/

>> the mean return to buying dual-class spreads when they are greater than 10% and holding to close is 9.75%, with an average holding period of 213 days
batbeer2
Batbeer2 premium member - 3 years ago
TATA has split its shares 5:1. The DVRs now trade for Rs 85 and the common trades for Rs 145.

Adjusting for the split, the gap between the two shares has closed from to Rs 90 to Rs 60.

Also, the CEO has stepped down.

http://www.moneycontrol.com/india/stockpricequote/auto-lcvshcvs/tata-motors-(dvr)/TMD

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