Tata Motors DVRs may see a gap-up start, says Nuvama. Here's why

Tata Motors DVR (differential voting rights), which has Rekha Jhunjhunwala among shareholders, may see a gap-up start on Wednesday morning after Tata Motors announced conversion of DVRs into ordinary shares while announcing its June quarter results in the previous session.

Putting an end to any guesswork, Nuvama Institutional Equities said, the Tata Motors board approved a scheme of arrangement for reduction of capital of the company by way of cancellation of the entire ‘A’ Ordinary Shares of the auto major and issuance and allotment of the ordinary shares.

The move is seen simplifying and consolidating the Tata Motors' capital structure and preserve liquidity for the auto major's growth. It is also seen as value accretive and beneficial for all shareholders of the company and allow the holders of the ‘A’ ordinary shares and ordinary shares to continue to participate in the company’s performance, Tata Motors said on Tuesday.

As per the arrangement, the shareholders of Tata Motors DVRs would receive 7 fully paid-up shares of Tata Motors for every 10 Tata Motors DVRs they held.

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"The spread is available at 20 per cent (favourable to DVR holder) and on Wednesday we should see Tata Motors/A significantly outperforming the ordinary shares. So, capturing 20 per cent or lucrative spread won’t be practically possible," Nuvama's Institutional Equities Abhilash Pagaria in a note.

Nuvama sees either of two scenarios playing out. It said if the spread between Tata Motors shares and Tata Motors DVRs trade at around 8-10 per cent, existing DVR/ordinary share spread holders should unwind their positions.

"Considering around 12 to 14 months’ time for conversion then a as per Nuvama Alternative, very ideal spread to set up a fresh position should be 15 per cent," it said.  The completion would require approval from Sebi, shareholders and creditors and NCLT.

"The biggest size (19.4 per cent of equity) is held by ICICI Prudential Mutual Fund. They have been a long term holder and certainly their conviction continues to pay off," Nuvama said.

Nuvama noted that Tata Motors DVR is not a constituent of most of the widely tracked passive indices like Nifty, Sensex and MSCI. It is just a member of FTSE and has a negligible weight of 14 basis points.

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