A Tale of Two Tatas!
The Star and the Shoddy: Closer look at the two titans of Tata to understand where the future unlocking opportunities may lie in the market
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Let us start with the titans first. Contrast is stark and striking between these two stars of Tata stable. One is shining in glory while the other is staring at a dark abyss. Both are catching headlines, but not for the same reasons. One for becoming the first Indian company to reach & breach the $100Bn market-cap and the other for its worst fall in its stock price to multi-year low. If there is anything similar at all between them (other than both belonging to Tata group), it is this: both derive significant part of their business from global customers.
To cut the suspense and come straight to the subject, as readers would have guessed, the companies we are alluding to are TCS and Tata Motors. Behind the "star and the shoddy" script of these companies, there is a bigger story that is playing out, understanding of which can help in identifying future winners. Let us take a closer look at the charts below. It is fascinating to know that the charts are not very different between TCS and TaMo if you take out the stock price from the charts.
More interestingly, has the growth rate materially changed for TCS for the stock to almost double from early 2016 levels. Numbers from the chart do not reflect any significant change in either top line or bottom line trend. Top line growth has been in single digit and not very far from that even for FY19 (estimates). If so, how does one explain the sharp surge in its stock price. If earnings had not changed materially, something must have changed materially to warrant near doubling of stock price. That something has a lot to do with how pessimistically or optimistically market views the outlook. In 2015 and early 2016, it is all about pessimism in the IT sector. Cloud and automation clouded the outlook in IT and market feared worst. As usually happens, in such times of cloudy outlook, market amplifies the ongoing challenges (normal otherwise) and manufactures a sort-of-perfect-storm for the sector. This is what happened when the market started magnifying the otherwise regular risks like H1B, wage hikes etc. When the worst did not happen (because of digital and automation), adjustment in price started happening, though the challenges continued. This gradual adjustment led to run-away optimism when the sector got the booster shot from the currency. To look back, none of the Industry's challenges have gone away, be it H1B issue, wage pressures, cloud, digital etc, except market's pessimistic view.
Similar script may be on play now in Tata Motors. Regular and ongoing cyclical challenges in JLR business are getting amplified by BrExit and trade war fears triggering all round pessimism on the prospects. Because of this overblown narrative on JLR, the stock has been punished to decade low valuation measured in terms of price-to-book. The last time it traded at such low valuation was in 2009. It is another matter that the stock returned 7 times in just three years post that crash.
If TaMo is a steal, what do you call the DVR (differential voting rights) version that trades at 40%+ discount? (for no apparent difference in the economic ownership). It is a classic 'Heads I win, Tails I don't lose much' situation.
Would you chase the star or the shoddy that is throwing up once-in-a-decade opportunity? Of course there is an emotional price to pay. If you align with the star, it will be very comforting emotionally with not much rewards in returns. On the other hand, sticking with shoddy, while emotionally wrecking, can be enriching and rewarding in financial returns. Choice is yours.
Happy Value Investing!!
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