Tata Investments: Attractively Priced Dividend Stock to Invest
Tata Investment Corporation Limited (TATAINVEST) operates as an non-banking financial company. Its primary activity is to invest in long-term equity shares and other securities of companies in a range of industries. It is also engaged in management and distribution of mutual funds. TATAINVEST operates as a subsidiary of Tata Sons Limited.
One notable aspect that I personally like about TATAINVEST is its business model. This revenue and profitability comes from dividend income and profits from selling investments. Majority of its long term investments are in blue chip companies that have good cash flow and profitable businesses.
Trend Analysis
The whole reason for any business to exist is to generate sales revenue and make more profits. At a minimum, the parameters listed below should have continuously increasing trends. All the data below is based on last 8 years i.e. from 2001 to 2008.
- Revenue: Increasing trend with average growth of 22% (SDev. 21%). Neutral observation.
- Earnings per share: Increasing trend with average growth of 26% (SDev. 26%). This shows very high variability over last 8 years. Not a good observation.
- Net cash flow from operations: The net cash flow from operations has an increasing trend. For most part, the net cash flow is equal to reported net profit. Good observation.
- Profit/Loss from operations: The Corporation is showing consistently increasing profits from its operations. Very good observation.
- Reported net profit: Increasing trend. Good observation.
- Gross margins: Very stable gross margins. Historical average of 96% (narrow stdev. of 0.86%). Very good observation.
- Operating margins: Very stable operating margins. Historical average of 96% (narrow stdev. of 0.80%). Very Good observation.
Tata Investment Corporation Ltd: Data Trends
Quality of Dividends
In this part of my analysis, I am trying to understand dividend growth rate, consistency, and ability of the corporation to demonstrate sustainability. In is also an indirect way to gauging management’s policy vis-à-vis sharing the profits with common shareholders.
- Dividend per share: Chart 3 shows that consistently increasing dividend payments. However, it is flat for last three years. Neutral observation.
- Payout factor: This is ratio of dividends per share divided by EPS. It has been maintaining consistent at below 30%. This is an indication that management believe in sharing some percentage of profits with common shareholder. Very good observation.
- Dividend growth rate: In last eight years, dividends have grown at an average rate of 28%. This is little bit higher than EPS growth rate of 26%. Neutral observation.
- Ratio of cash from operations to reported net profit: This ratio is consistently at 1.0. Good observation.
- Ratio of profits from operations to reported net profit: This ratio is consistently around one. Good observation.
- Ratio of Cash from operations to total debt: This ratio is consistently more than one. In fact, the corporation can be considered practically debt free. Very good observation.
Dividend Cash Flow vs. Risk Free Savings Cash Flow
Why should I take risk if I can get a same or more cash flow by putting my capital into any risk free savings, fixed deposits, or any such risk free accounts? Therefore, I try to understand how dividends will affect my cash flow in 10 years of time period. The baseline assumptions are (1) the stock’s dividend yield is 3.6% at current price of Rs. 417.45; and (2) savings interest rate is 7%.
- Best case scenario: considering average dividend growth rate of 28% for last eight years, the dividend cash flow will be 2.65 times the cash flow from savings interest at the end of 10 years.
- Worst case scenario: considering low end of the expected dividend growth of 10%, the dividend cash follow will be only 0.66 times the cash flow from savings interest at the end of 10 years.
- In order to have equal cash flow (i.e. dividends = savings interest) in 10 years time period, the current yield should be 5.1% with average dividend growth of 10%. At this yield the buy price is Rs. 295.10.
Projected Beta-based Expected Return [Methodology]
I measured Beta for this stock’s risk (or price movement) relative to the S&P CNX NIFTY (or index movement). Here, I am trying to understand how a stock price behaves relative to the market and how to factor in the capital appreciation into my expected returns.
- The stocks three year Beta value is 0.54. This means this stock is relatively less volatile w.r.t. S&P CNX NIFTY index.
- The expected return is 11.6% relative to market index.
- Now factoring in 11.6% of expected return into the worst case dividend growth of 10% and current yield of 3.6%, the total cash flow is 3.07 times the savings interest rate.
Fair Value Calculation [Methodology]
I am continuing my analysis to estimate the fair value so that we can understand return characteristics for this investment.
- NPV price based on 15 year DCF: Rs. 687.7 [Methodology]
- Average high yield price calculated based on past 8 years: Rs. 224
- Pricing relative to 8 year average PE ratio: Rs. 525.2
- Pricing based on PE ratio of 12: Rs. 615.9
- Graham number: Rs. 531.9
The range of fair value is calculated as Rs. 428.5 to Rs. 516.9
Qualitative Analysis
- I like TATAINVEST‘s business model. Its revenue and profitability comes from dividend income and selling of its long term investment positions.
- It does not need large capital for its operating needs, expenses, depreciation, etc. For practical purposes, all of its cash flow can be considered as profits. This is reflected on Chart 2 above, where cash flow curve and net profit overlap each other.
- For all practical purposes, this is almost a zero debt company. I like this aspect of TATAINVEST.
- It has had a very favorable dividend strategy in which it consistently shared its profits with shareholders. The dividends have more than doubled in last 5 years.
- Considering the long term growth prospect of Indian economy, I believe TATAINVEST is very well position for future growth.
Price Chart (Courtesy: MoneyVidya.com)
Summary…
I would like my personal portfolio to be model according to TATAINVEST business model. The philosophy of my income portfolio is similar to TATAINVEST, i.e. revenue and profitability from dividend income and selling my long term investment positions. The difference is I am a small time individual investor. However, I get motivated by the fact that this model works.
The table below shows the return characteristics of the investment scenario for next 10 years (Note: this return characteristic is relative to savings cash flow and relative to index performance).
Return Characteristics for 10+ year of Investments
I already own TATAINVEST. It continues to be attractively priced. Therefore, I would be willing to add to my existing position as long as my allocation level allows.
Full disclosure: I am long on TATAINVEST.
Disclaimer: This analysis is in the context of my long term investment philosophy. It is in line with my investment objectives and my personal risk profile. Please do your own research before making an investment decisions for TATAINVEST.
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Hi TIPguy.
This was my second top holding after Balmer & lawrie. This is very good company. I have sold my entire portfolio last Friday including Balmer & TIC. However I got 7% divd yield on TIC.
My calculation of Intrinsic value of TIC gives me value of Rs.900 that means i should by TIC at or below 450 keeping 50% margin of safety.
However one can get chance to accumulate this around 330 & below.
I enjoy reading your blog and started writing my own experience of my Investing journey here.
http://www.myincomeportfolio.blogspot.com/
I am not very good at English communication and improving that would be one of my objectives in writing the blog.
Kind Regards
MIP
MIP,
Good to know your buy price is Rs 450 (inline with my fair value which I am willing to pay).
Good luck in your blogging endeavor!
Best Wishes,
Hey Tip,
I am new to this blog. really inspired by way of analysis. Thanks for all the posts
Sivaraman,
Thanks for the message. And hope to see you back with more comments and critical questions….
Best Wishes,
Hi TIP Guy,
I can see that my comments are blocked on this blog and i can certainly guess that because of my last couple of aggressive comments this is being done.
I apologize for being offensive but that was not my intention. I just wanted to argue on some points may be my way of arguing was not well mannered.
However i wish to follow your blog regularly.
Kind regards
MIP
my blocked comment was under name BuffetFan
================
Hi TIPguy.
This was my second top holding after Balmer & lawrie. This is very good company. I have sold my entire portfolio last Friday including Balmer & TIC. However I got 7% divd yield on TIC.
My calculation of Intrinsic value of TIC gives me value of Rs.900 that means i should by TIC at or below 450 keeping 50% margin of safety.
However one can get chance to accumulate this around 330 & below.
I enjoy reading your blog and started writing my own experience of my Investing journey here.
http://www.myincomeportfolio.blogspot.com/
I am not very good at English communication and improving that would be one of my objectives in writing the blog.
Kind Regards
MIP
==============
MIP/BuffetFan,
I only have spam filter, which blocks spam. I think your comment got blocked because (1) it had links in them; and (2) Your name seems similar to my blog name. Many readers have attempted to display comments (or respond to comments) using my blog name itself. Therefore, the spam filter blocks such comments. It waits for my approval before it gets displayed.
I do not have any blocks on any comments or any particular reader. All comments get automatically posted (assuming it clears spam filter). I keep/display any or all comments that have decent topical or subject related argument. Comments against my investing philosophy are also welcome. I have no issues, because I do not write this blog for selling or preaching anything. I write to share, I write to express, I write to initiate a constructive discussion.
I moderate and delete only for non-subject related arguments or personal references. That too after comment has been posted (not before posting). I delete all advts, and sales and marketing stunts people play with comments section.
I appreciate you leaving thoughtful comments, even if I may have a difference of opinion.
Best Wishes,
Hi TIP Guy
In my opinion the starting of point for evaluating TIC would be look at what the stock price to current Market value/ NAV of the portfolio that it holds.
When we say that it has demonstrated sustained dividend growth over the years, it essentially means that the companies that it has invested in have delivered superior returns.
I would evaluate it like a Mutual fund scheme. Essentially we are saying the fund managers at TIC will do better than a average fund manager at a fund house.
So if the stock price/ Book value is more than 1 then u r saying that the guys at TIC will generate far superior returns compared to a MF fund manager and hence one pays higher than the NAV. Whereas in a MF scheme u will get it at NAV.
I have evaluated TIC in the past and my way of looking at it is to buy it when it is a substantial discount to book value.
Otherwise its performance could be as good or bad as any fund manager.
Cheers
Ninad
Hello Ninad,
I can understand your premise and thought process behind it. Buy at substantial discount to book value is a classical value principle. Continuing further, my question would be what is the book value?
I believe, looking at TIC as mutual fund is a good start. However, my understanding is, TIC’s business model has more to it than just MF. Yes, MF does form a part of its business model. It is like an investment banking, which includes promoting unlisted companies/ projects, investments in government securities and bonds, etc.
Correct me if I am wrong, in essence, MFs are sophisticated traders whose focus is not to stick with their investments to build long term profits/value. They are primarily driven by concept of profit bookings. While my expectation is TIC as a company would be more focused on building businesses rather profit bookings. Since MF is part of TIC the profit bookings part cannot be zero, but at least it is has other aspects also.
Furthermore, my view is, sustained dividend growth is just a part of total return. I view it only as an additional collateral benefit while waiting/giving time to management to continue to build business and increase NAV over long term. I prefer investing in dividend friendly company, with the underlying assumptions that company is sustainably generating real cash and hence probability of its success will be higher. But that’s a different discussion.
Thanks for stopping by and leaving a thoughtful comment.
Best Wishes,
Hi Ninad
If you read the AR of TIC then you will see that their NAV as on 31 march 2009 is around Rs.505. while that time it was trading at 250. Since march market has appreciated much so NAV must have risen to considerable level. so 380 would be decent price to enter.
However i would like to bring to your notice TIPguy that Dividend income is much less than realized profits. So if you still advocate Buy & hold strategy, then i would request you to see TIC’s investment model, How often they churn their portfolio etc. Read their last year’s manual release on the occasion of right issue. It’s fantastic guide for any value investor.
MIP
Hello MIP,
Thanks for your comment and recommendation. I will read TIC’s rights issue manual release.
Best Wishes,
TIC more looks like a balanced MF scheme, attractiveness of it is that it is avaliable on discount for long term investment.
TIC has ~30% invested in Corporate deposites/FMP or like interest generating schemes .. rest 70% in stocks .. which get accounted in books at stock BV or purchase price which ever is lesser.
Earning from fixed return is utilised to give dividend which becomes attractive as share is bough at discount compared to present value of investment.
Booking profit of long term invested income again helps showing earning and increased BV because of reinvestment of same in other stock (which get comes at higher BV for same CMP).
Hi Bhupesh,
I agree with your views on TIC. As a fund company, yes I would tend to agree that they need to book profit.
Thanks for your comment and useful insight about TIC.
Best Wishes,
Sir,
TIC has been a good performer.I was going through financials of the company.
Where can we find the companies in which TIC has invested.The link under tata website gives all information except for this detail.
thanks
Saif,
I couldn’t find it. If you are able to, let me also now.
Best Wishes
sure sir…shouldn’t it be part of the disclosure…strange they have not put up on the website…knowing the invested companies would perhaps help analyze the portfolio for any future shocks in their prices…
After lot of scouting ,i found one link
http://perknlife.blogspot.com/2009/12/tata-investment-corporation.html
doesn’t give the entire detail of holdings…i contacted the blogger..he said he got the list in the annual printed report since he owns the shares for a long time..
lots of tata companies(no surprise there)..but overall a good mix of different sectors…banks,textiles,oil,shipping.
whats your view sir.
2 points if entered the contest
Saif,
This is very good. Thanks for the effort and appreciate you digging this info.
Best Wishes,
I found the annual report for the company at this location http://tatainvestment.com/images/AnualReport2009-10.pdf
What surprised me is they are invested into roughly 200 companies !!
Any comments on that ?? Is that good/bad/neutral ?
Regards
Raja
Raja,
Thanks for the annual report. I am not surprised about number of companies. Purely based on number of companies alone, in am in neutral territory. As long as it does what I am looking for, it is good.
Best Wishes,
Isn’t the Bajaj Holding is better option than TIC?
why do you think Bajaj Holdings is better option than TIC ?