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Safal Niveshak StockTalk #11: Tata Investment Corp. Ltd.

Disclaimer: The opinions in this report are for “informational and educational” purposes only and should not be construed as a recommendation to buy or sell the stock(s) mentioned. I do not recommend that you act upon any investment information without first doing an independent research as to the suitability of such investment for your specific situation.

Welcome to the eleventh issue of Safal Niveshak StockTalk.

After covering Cera Sanitaryware last time, this time I’ve researched on Tata Investment Corp. Ltd. (TICL), a non-banking finance company (NBFC) involved in the business of investing in equity shares and equity-related securities (it’s like a quasi-mutual fund, except that it does not invest investors’ money, but its own).

Anyways, before we dive deeper into TICL, here is a brief overview of the sections of this report.

  1. About TICL
  2. Safal Niveshak’s 20-Point Checklist
  3. Intrinsic Value Assumptions
  4. Risk Statement
  5. Financial & Market Snapshot

1. About TICL

TICL is a non-banking finance company (NBFC) involved in the business of investing in equity shares and equity-related securities. It’s like a quasi-mutual fund, except that it does not invest investors’ money, but its own. The company started as an institution assisting the Tata Group in the establishment of new ventures, but gradually moved to acting as an investment company with a diversified portfolio of equity and other investments.


Data Source: Ace Equity, Safal Niveshak Research

TICL generates its revenue via dividend and interest income from its investments, plus profit on sale of investments. Over the past 10 years, the company’s revenue has grown at an average annual rate of 16%, while net profit has grown at 15%.

Here is a note on TICL’s investment philosophy that I culled out from their offer document for the rights issue of September 2008. This gives me some comfort about the company’s core investment philosophy, which is a lot similar to what a “value investor” would follow:

The investment policy of the Company is exemplified by the following broad principles:

The Company’s philosophy is to invest predominantly on a long-term basis in industrial companies that are well-managed and offer potential for high dividend yield as well as high growth and whose stock may be trading at a discount to its underlying intrinsic value.

The Company proposes to diversify its investment portfolio by making investments in potential growth sectors and in unlisted companies which it believes has unrecognized potential, or is undervalued. However, the Company would selectively churn its long-term investment portfolio and invest in potential growth companies and sectors which offer an acceptable dividend yield as and when the opportunity arises.

The Company will focus on the following criteria in appraising potential investments:
1. earnings growth;
2. return on equity;
3. free cash flow generation;
4. management;
5. valuation; and
6. industry and relative industry position.

The typical investment approach of the Company will be to seek a combination of value and growth. A company that exhibits growth characteristics, is well managed and has a sound position in its industry is an ideal investment opportunity for the Company. A company that is seen as overvalued relative to these characteristics will generally not be considered for investment.

The Company will not invest in companies that are subject to extreme volatility and are difficult to value according to conservative accounting and investment principles.

The Company typically follows a “bottom-up” investment strategy i.e. the Company focuses on identifying individual stocks for investment, based on factors including historical operational and financial performance, current financial condition and growth prospects that are undervalued in relative and absolute terms.

The Company typically does not follow a “top-down” investment strategy that focuses on selection of attractive equity markets for investment based on various historical and projected financial and macroeconomic parameters for each market and then investing in selected individual stocks and sectors in that market.

The Company takes into account various market indices, particularly the BSE30 and the BSE200 in making investment decisions as part of its ‘bottom-up” strategy. The Company believes that there are fewer attractively valued stocks at very high absolute and relative levels of such market indices, whilst there are comparatively more attractively valued stocks at low absolute and relative levels of the market indices.


Sector-wise Equity Portfolio

Source: TICL’s FY12 Annual Report, Safal Niveshak Research

TICL’s Top 18 Equity Holdings

Source: TICL’s FY12 Annual Report, Safal Niveshak Research


2. Safal Niveshak’s 20-Point Checklist

Keeping in mind the simplicity aspect that is otherwise missing in other company analysis reports you would come across, I’ve analyzed TICL by answering 20 important questions that span its:

  1. Business performance,
  2. Financial performance,
  3. Management quality, and
  4. Competition.

However, given that TICL’s business (of managing its own money) is unlike other companies, there might be checklist points that might not be valid for the company.

Before we move ahead, here are the symbols that I’ve placed against each checklist point and that will tell you at a glance whether I have a positive or negative view on that particular point.

   Indicates my positive view

   Indicates my negative view

Let’s get started.

A. Business

1. Can I, in simple words, explain what the company does?
Yes. TICL is a non-banking finance company (NBFC) involved in the business of investing in equity shares and equity-related securities (it’s like a quasi-mutual fund, except that it does not invest investors’ money, but its own). It earns its revenue in the form of divided and interest income from its investments, plus profit that it earns on sale of investments.

2. Does the business have high uncertainty?
The inherent nature of TICL’s business is not uncertain. After all, it does not sell any products/services neither is it dependent on raw material supplies from anyone. Its raw material is its “own money” and the income is in the form of dividend and interest that it earns on this “own money”.

The key uncertainties with respect to TICL’s business lie in the uncertainty of stock markets – which impacts the capital appreciation of TICL’s stock investments and thus future profit/loss on sale of these investments – plus the uncertainty of dividend payments by listed Indian companies – which impacts the company’s core income.

Dividend income currently forms around 51% of TICL’s total revenue (excluding profit on sale of investments), while the remaining 49% comes from interest on deposits and income from other investments.

3. Has the business got an enormous moat?
No question of moat here, because the company does not compete against anyone else except its own past. There is another listed investment company, Bajaj Holdings & Investment Ltd., but around 50% of the latter’s equity investments are concentrated in just three stocks (Bajaj Auto, Bajaj Finserv, and ICICI Bank). So there’s no real comparison between the two companies.

4. Does the business generate strong free cash flow?
Yes. Since TICL does not have to invest in any plant and machinery or office space, and also does not have to hold any receivables or inventory, whatever cash it generates from operations is free cash. The company pays a part of this free cash as dividends (average dividend payout has been around 30%), while the rest is invested plus kept as cash for tapping future investments.


Data Source: Ace Equity, Safal Niveshak Research

5. What is the bargaining power of suppliers and buyers?
TICL produces its own raw material (cash) and sells no product or service. Thus it has no buyer or supplier and therefore this checklist point is not valid for it.

B. Financial Performance

6. Does the business have a consistent sales and profit growth history and is there room for future growth?
Yes, except FY12 when its revenue and profit fell by 17% and 19% respectively. TICL has grown its revenue (interest and dividend income, plus profit on sale of investments) and net profit at average annual rates of 16% and 15% respectively over the past 10 years. This is a reflection largely of the quality of its investments that have delivered good long term returns (in terms of dividend and interest payments, plus capital appreciation).

While one may compare TICL’s revenue growth with the 21% average annual return that the Sensex has given over these 10 years, and think that the former has underperformed, it is worth noting here that TICL has not invested 100% of its money in equities. Thus comparing its revenue growth with the stock market performance won’t be right.


Data Source: Ace Equity, Safal Niveshak Research

7. Are gross profit margins higher than 40%?
Gross profit margin (GPM) suggests the true profitability of a company’s operations. Buffett would generally like a company earning >40% margin, but this is true largely of consumer goods companies. As for TICL, since the company does not operate any manufacturing unit and bears very negligible other costs, its average GPM for the last 10 years has been around 97%, which is a very good number.


Data Source: Ace Equity, Safal Niveshak Research

8. Is its operating cash flow higher than net profits?
This metric isn’t valid for TICL because its operating cash flow is almost same as net profit given that the company does not bear much depreciation, and has zero inventory and negligible receivables.

9. Is the debt to equity below 0.5 times?
TICL is a zero-debt company. It generates ample money from its existing investments, which it reinvests into new investments.

10. Is the current ratio greater than 1.5?
This metric is not valid for TICL.

11. Does the company have a good dividend history?
Fair enough. In terms of dividend payout (amount of dividend paid as percentage of net profit), TICL has averaged around 30% over the past 10 years, which is a comfortable level of payout.

12. Is the Altman Z score > 3?
Yes, the number for TICL is 10.8, which makes it far away from any possible bankruptcy. Read more on the Altman Z-Score.

13. How capital intensive is the business?
This metric is not truly valid for TICL. This is simply because the company’s revenues (the numerator for this metric, or the dividend and interest income) will always be a fraction of its capital (the denominator, or its investments at book value).

14. Has it got a high and consistent return on equity?
TICL’s return on equity is akin to you earning a certain amount every year on your investments (no paper profits but actual dividend and interest income plus any profit on sale of investments). Looking that way, TICL’s average return on equity of 20% is a good number. This is reflective of the good yield its investments have earned for it over the years, which has largely been a result of an overall good performance by the stock market.

C. Management Quality

15. Is the management known for its capital allocation skill and integrity?
Being a Tata Group company, there is no doubt that TICL has a management that considers integrity as a core business value. As far as capital allocation skill is concerned, that is reflected in the good 20% average return on equity the company has earned over the years.

Interestingly however, like most investors, TICL has also been guilty of making bad investments in the past. This includes owning Reliance Power (average cost of Rs 450 per share; bought in FY08 and sold in FY09), Satyam (average cost of Rs 453 per share; sold in FY09), DLF (average cost of Rs 555; bought in FY09 and sold in FY10), and Suzlon (average cost of Rs 75; bought in FY10-11 and sold in FY11).

The good part is that the company has not held on to these losing businesses for long, thus saving a greater erosion of its capital.

16. Has there been any substantial equity dilution in the past?
Yes. TICL has seen a 60% increase in its outstanding equity shares over the past three years. This has been on account of conversion of debentures (2009), bonds (2010), and warrants (2011) into equity shares.

17. Are management’s salaries too high?
TICL’s two executive directors together earned Rs 3.2 crore as salary and perks in FY12. This is around 2% of the company’s net profit and thus not a big figure.

18. What has management done with the cash in the past?
TICL’s business is to generate new cash from existing cash (investments) and invest in new investments, plus pay dividends. This is exactly what the management has done with its cash in the past.

Given that the company continues to generate good return on capital employed, it can be inferred that the cash has been put to profitable use by the management.

D. Competition

19. Does the business face high competition?
As discussed above, TICL does not compete against anyone else except its own past. There is another listed investment company, Bajaj Holdings & Investment Ltd., but then these two do not compete against each other as they manage their respective money and are not fighting to get money from external investors (like mutual funds do).

20. Has the management focused on market share or profitability in the past?
Not a valid metric for TICL.

3. Intrinsic Value Assumptions

Before I move into calculating the intrinsic or fair value range for TICL, let me make one thing very clear.

Intrinsic value isn’t a definite figure but just a ‘calculated’ value. In fact, the calculation of intrinsic value of a business mostly throws up a highly subjective figure. And this figure changes as estimates of variable like future cash flows change (given that the future is unknown).

Anyways, what I have done here is rather than arrive at a single intrinsic value figure for TICL, I have calculated the value using 4 different methods and then arrived at a ‘fair value range’ for the stock.

1. Net present value based on a 2-stage 10-year DCF
The discussion about the calculation of net present value using a discounted cash flow model (DCF) can be found in the 7th lesson of my free course on investing – Value Investing for Smart People.

I have done a 2-stage DCF analysis for arriving at the intrinsic value for TICL.

As a reference, here is the formula for calculating the NPV:

NPV = CFi / (1+k) + CF2 / (1+k)2 + … [TCF / (k – g)] / (1+k)n-1

Where:
PV = present value
CFi = cash flow in year i
k = discount rate
g = growth rate assumption in perpetuity beyond terminal year
TCF = the terminal year cash flow
n = the number of periods in the valuation model including the terminal year

I have calculated TICL’s future cash flow for the next 10 years, assuming 2 different rates of growth in cash flows of 10% (years 1-5), and 8% (years 6-10).

As for the discount rate, I’ve assumed it at 12%. Why 12%? Well my reasoning is based on looking at the quality of top 18 stocks TICL holds in its portfolio, which together form around 80% of its equity portfolio. A majority of these are safe businesses, which, I believe, will be valued at discount rates ranging from 10-12%. Plus TICL also holds a lot of fixed instruments in its investment portfolio, the discount rates for which will be sub-10%. Thus, I believe a discount rate of 12% for the company is a reasonable number. The terminal growth rate I have assumed for the company’s cash flows – expected growth in cash flow after 10 years and till eternity – is 2%.

Based on these numbers and after reducing the net debt (debt minus cash), the present or discounted value of future cash flows for TICL is coming at Rs 660 per share, which is also the stock’s intrinsic value using this method.

2. Earnings Power Value (EPV)
After DCF, the second most reliable measure of a firm’s intrinsic value is the value of its current earnings. This method is known as ‘Earning Power Value’ or EPV. This value can be estimated with more certainty than future earnings or cash flows, and it is more relevant to today’s values than are earnings in the past.

The formula for EPV of a company is:

EPV = Adjusted Earnings x 1/R

Here, ‘R’ is the cost of capital.

TICL’s past 5 years average EPS (earnings per share) has been around Rs 43.8. Assuming the company’s EPS to stagnate as this level, and applying the EPV formula here, I multiply Rs 43.8 with 1/12% (12% being the discount rate for the company).

This gives me a value of Rs 365 per share, which is TICL’s intrinsic value as per the EPV calculation.

3. Pricing relative to 10 year average P/E ratio
True value investors, as Graham has prescribed, won’t pay a price based on the stock’s latest P/E or the company’s latest earnings. They will take a much longer term view…as long as 10 years.

Here, I have attempted to estimate the intrinsic value of TICL using the company’s last 5 years average earnings and last 10 years average P/E ratio. So the formula is:

Last 5 Years Average EPS x Last 10 Years Average P/E Ratio

TICL’s average P/E ratio for the past 10 years has been around 9.2 times, while its last 5 years’ average EPS has been Rs 43.8 per share. Based on the formula, and applying a multiple of 1.3x assuming that TICL’s business deserves an average P/E multiple of not 9x but around 12x, the intrinsic value is coming to around Rs 534 per share.

4. Graham number
Graham number is the formula Ben Graham used to calculate the maximum price one should pay for a stock. As per this rule, the product of a stock’s price to earnings (P/E) and price to book value (P/BV) should not be more than 22.5 i.e., P/E of 15 multiplied by P/BV of 1.5.

But why did Graham specifically used a P/E of 15 and P/BV of 1.5? Why didn’t he use some other numbers?

Well, he thought that nobody should be willing to pay more than the AAA bond yield at that time. AAA bond yield at that time was 7.5%. Therefore, AAA P/E was arrived at 1/7.5 or 13.3, which was rounded up to 15. Similarly he thought that nobody should pay more than 1.5 P/BV for a stock.

Graham insisted that the product of the two shouldn’t be more than 22.5. In other words,

(P/E of 15) x (P/BV of 1.5) = 22.5

Put another way:

(P/E) x (P/BV) = 22.5

Price(sqr)/(EPS x BVPS) = 22.5

Price(sqr) = 22.5 x EPS x BVPS

Take the square root of both sides, and you get the equation for the Graham Number.

Fair Value Price = Square Root of (22.5 x EPS x BVPS)

Applying this formula, TICL’s intrinsic value comes to around Rs 586 per share.

Fair Value Range
Based on the above calculated intrinsic values for TICL, I can arrive at a ‘fair value range’ for the stock. Here is how I calculate it:

High End of the Fair Value Range = [Average of above four intrinsic values] Low End = [(Average of above four intrinsic values) – (0.5) x (Std Dev)]

Based on this, the fair value range for TICL’s stock is around Rs 475 to Rs 540. Assuming a margin of safety of 30% to the average of this range, the comfortable buying price for TICL’s stock comes to Rs 355 using the intrinsic values calculated above.

Given that TICL’s current price of Rs 440 is around 24% higher than the above calculated comfortable buying price, I won’t buy the stock before it falls to (or near) my comfortable buying price of Rs 355.

TICL’s current dividend yield is around 3.6% (based on FY12 dividend and excluding the one-time “platinum jubilee” dividend), which is in itself a good number for investors looking for pure income-generating investments. Note however that the dividends have been almost stagnant for the past five years, again a reflection of the performance of TICL’s portfolio companies.

NAV, a quick check on TICL’s intrinsic value
One quick way to see how cheap or expensive TICL is trading at, you can compare the stock price with the net asset value (NAV) of its investments.

Since TICL is an investment company (like a mutual fund, but managing its own money), it publishes an NAV of its investments every quarter.

Here is how the company defines NAV – “The NAV is computed on the basis of the market value of quoted investments, NAVs of unquoted mutual funds, most of the other equity investments in unlisted companies taken on the basis of the last available independent valuations based on the balance sheets available as at 31st March, 2011, and the relatively small balance of unquoted investments taken at respective book values.

Here is a chart comparing the company’s NAV with its stock price starting March 2008.


Source: TICL, Safal Niveshak Research

As you can see, the stock price has largely moved in line with the NAV. The stock price however has always traded at a discount to the NAV (given TICL’s holding company nature). The average discount to NAV has been around 35% over these past four years. This is however excluding the deep discount that the stock was trading at the peak of financial crisis during 2008-09. That time, as you can see, the discount to NAV touched 55-60%.

If I were to look at the company’s current NAV of Rs 725 per share, I would be happy buying it at a price that is around 50% of the NAV, or Rs 360 per share (around 18% lower than the stock’s current price).

Again, why such a large discount to NAV? Simply because TICL’s performance can be as volatile as that of the stock market or any mutual fund, and thus I won’t like to be caught on the wrong foot buying it anywhere close to NAV.

This (Rs 360, or 50% to current NAV) is pretty close to my above calculated intrinsic value using 4 different methods, and thus provides me a cross-check for my calculations.

4. Risk Statement

TICL’s business, when purchased at a good buying price can provide a great amount of stability to an investor’s portfolio. It’s a very simple business model, does not need large or regular capital infusion for expansion or running daily operations, has no major expenses and thus earns a solid margin, pays a reasonably good dividend, and generates a consistent free cash flow.

Plus, if you are a believer in the long term growth story of Indian stock market, TICL can be a great, stable long-term investment if bought at the right price.

But then, dependence on the stock market also creates the risk of the business remaining a stagnant or declining when the market is not doing well, or the company can’t find good investment opportunities.

Plus, since the raw material is “cash”, which is the easiest thing to waste in the world, this is another risk I find inherent to TICL’s business model (as seen from its few blunders of investing in stocks like Reliance Power, Suzlon, and DLF).

One technical risk of investing in TICL is that, based on data from the past 52-weeks, the average daily liquidity in the stock is just 3,500 shares. This raises the impact cost of any bulk buying or selling in the stock.

Overall, TICL is a play on the management’s capital allocation skills. They have done reasonably well in the past on this front (except a few bumps like Reliance Power, Suzlon etc.). And if past is any indicator of the future, TICL can be a great addition to a long-term portfolio if bought at the right price.


5. Financial & Market Snapshot


Data Source: Ace Equity, Safal Niveshak Research


Data Source: Ace Equity, Safal Niveshak Research

    
Data Source: Ace Equity, Safal Niveshak Research

Disclaimer: The author of this report, or any of his family members, does not own the stock(s) mentioned herein. The opinions in this report are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stock(s) mentioned or to solicit transactions or clients. The information in this report is believed to be accurate, but under no circumstances should a person act upon the information contained within. I do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. sanjeevbhatia says:

    Why have we discarded Dividend Discount Valuation as given in some of earlier stock talks? Any particular reason?

    • Sanjeev, DDM unduly penalizes companies that have not been great dividend payers…and thus I avoid using it for all companies. While TICL has paid decent dividends in the past, it utilizes a large part of its FCF to reinvest. Thus I have avoided using DDM here.

  2. Item # 12 is marked red. should be green.

  3. vishal,
    why 30% MOS for this company?

  4. Interesting, as always. So now we have a NBFC duly analysed. Thank you.
    I agree the margin of safety here should be higher.

  5. Nice one vishal… a long pending request on analysi of NBFC’s …
    One more request vishal… An analysis on Bank…

  6. A few things on the post:
    – Co is at a significant discount to NAV of 35%. In the past discount has fluctuated around this range. How friendly is the management in unlocking value? Has management in the past tried to sell their holdings and buy back their shares to reduce the discount? That can immediately add a lot of value to this company.
    – Co has some marquee names in its portfolio. It would be interesting to see whether that portfolio would classify as “value approach” or are they keeping expensive stocks in their portfolio?
    – This stock is a lot like buying a Closed End Mutual Fund. I wonder how it compares to other Closed End fund in terms of its appeal.
    – Lastly, earnings have not gone anywhere over the last few years (likely related to Sensex having done nothing). Any view on what can be expected in the future?

    • Hi Rajeev…

      //Co is at a significant discount to NAV of 35%. In the past discount has fluctuated around this range. How friendly is the management in unlocking value? Has management in the past tried to sell their holdings and buy back their shares to reduce the discount? That can immediately add a lot of value to this company.//

      The company has continuously sold investments at profit, as can be seen from the high “profit on sale of investments” figure. I am though not sure if they have bought back the same stocks at lower prices.

      //Co has some marquee names in its portfolio. It would be interesting to see whether that portfolio would classify as “value approach” or are they keeping expensive stocks in their portfolio?//

      One thing is that TICL “must” remain invested in Tata Group stocks given that it also acts as a holding company to ward off raiders from Tata group cos. But as I can gauge from the cost of purchase of most of the stocks (Tata and non-Tata), that has been at much lower prices than they are trading today. Aadjusting for the 2008 and subsequent slowdown, this is a good observation.

      //This stock is a lot like buying a Closed End Mutual Fund. I wonder how it compares to other Closed End fund in terms of its appeal.//

      Well, I think it’s more like an open-ended balanced scheme as you, as an investor, don’t have any lock-in period to remain invested. Anyways, the performance has been weaker than some of the best balanced funds. But then, that’s the reason you can buy those funds “at NAV”, but must buy TICL “below NAV”.

      //Lastly, earnings have not gone anywhere over the last few years (likely related to Sensex having done nothing). Any view on what can be expected in the future?//

      The expectation is that earnings will remain tied to the stock market performance. 🙂

      Regards,
      Vishal

  7. Hitesh Chauhan says:

    Hi Vishal,

    I have some misunderstanding about the calculation of
    DCF method of intrisic value. How it is arrived at 660/- .
    please clarify.

    thanks and regards

    • Hitesh, I have used the past 9-10 years’ average FCF as the base (since FCF is dependent on a volatile industry – stock market) and then used the calculations explained in the report above. What specific doubts you have?

  8. Good analysis as always..:)

  9. Hi Vishal,

    I have two questions:
    1. You write that TICL deserves a P/E multiple of 12x instead of 9x – what is your reasoning here?
    2. You write that the stock has always traded at a discount to the NAV “given TICL’s holding company nature” – could you elaborate why that circumstance effects a discount?

    Thanks!

    • Hi Fabian – (1) Just because the quality of its business deserves a higher P/E, and I think 12x is a reasonable assumption. (2) Holding companies always trade at a 30-40% discount to their held asset value. This is because the claim of investors on these assets is even secondary to the claim of the investors in the held companies. Regards.

  10. Hi Vishal,

    1. For the past 10 years there is huge difference between the company revenue growth of 16% vs HDFC Prudence Fund of 28%. Is this not a cause for concern?

    2. Of the top 18 Equity Holdings 7 of them are from Tata and the returns from Titan Industries and Tata Chemicals is huge and the reason could be because these stocks could have been acquired when it is was a institution assisting the Tata Group. What is your take on this?

    • Hi Jana, as for your first point, well it was a mistaken comparison from my side. I must’ve compared TICL’s stock returns with HDFC Prudence’s returns for a proper comparison. When I am comparing TICL’s revenue growth, it must be with the revenue growth of HDFC Prudence Fund in case the latter was a separate legal entity. So it was an incorrect comparison and thus I have removed that small part from the report.

      Anyways, if you compare TICL’s stock return with HDFC Prudence over the past 10 years, the former’s return of 24% CAGR has not been far behind HDFC Prudence’s 28%.

      On second point, yes Tata Group companies will remain the largest part of TICL’s portfolios and that is the purpose of a holding company like business. And that is why it will always trade a a discount to NAV. Regards.

      • You mean 4% difference is small? Rs. 100 would have grown to Rs.1181 compared to Rs.859. The difference is more 3 times the capital deployed.

        • Of course not! When I am looking into the future, a 4% extra return would hold a lot of relevance for my investment selection (if I am able to look through future, that is). But in hindsight, if I had invested in TICL and had earned 24% CAGR, I would have been very happy (and not disappointed that I did not invest for 28% CAGR in HDFC Prudence).

          Also, I am not trying to compare TICL with HDFC Prudence to find out which has been a better investment. This is just a reference check against the best in the industry, where a majority of equity funds have not been able to beat the benchmark index. And TICL, despite being like a balanced fund, has beaten the index returns.

  11. What is the reason for taking avg eps of 5 years and avg pe of 10 years? Why not same no of years for average for both?

    • Dhruv, P/E is a more volatile variable than EPS and thus the variation. Generally, I take 3-yr average EPS and 10-yr average P/E, but since TICL is a stock market dependent company, I’ve taken a 5-yr average EPS. Again, this is a very subjective issue like all IV calculations are. Regards.

  12. Thanks Vishal, nice analysis 🙂

    Would you classify such a business as a “safe portion” or portfolio, where you only expect ~4% dividend and barely any capital appreciation…consider this. Suppose market crashes in next 3 months and TCIL again trades at 60% discount to NAV, and we buy it for Rs 360, and then markets recover in next 3 years and it again trades back at 35% discount, and NAV grows by 10% (predominantly because of large positions in big index stocks, which won’t grow fast). So, after 3 years, I can expect the stock to trade at about Rs 600 – 650, which gives me roughly a 2 bagger in 3 years…

    It maybe a very good return, but, then, would you care about opportunity cost and instead look for a business with greater potential?

    As i write, I’m essentially trying to ask: given a choice b/w TCIL like business and a small cap which has potential to grow, which one will you choose? More importantly, does it make any sense to have portfolio allocation in terms of this classification – I’d consider TCIL a stalwart…so probably food for thought on portfolio allocation based on investment type (slow growers, stalwarts, etc…)

  13. To add, would you consider the risk of TCIL’s holding NAV not growing in future, since these are already big stocks, possibly overvalued to a great deal? Yes, TCIL bought them at deep discounts, but when we buy TCIL, we’re still probably paying far too much? Or this risk is already factored in our IV calculation…sorry, I can’t see this somehow 🙁

  14. Dear Vishal –
    Came across this wonderful blog. Kudos to your efforts.
    Wonderful Analysis. I wanted to know how are your getting the Ace Equity Data. Is it available on the internet somewhere.

    – Kapil

  15. R K Chandrashekar says:

    Dear Vishal
    As usual you have maintained the high standards of analysis. More to the point:
    1. Holding companies generally trade at a discount to the underlying stocks they hold.
    2. Holding companies are poor on liquidity front. Normally a few thousand shares are traded every day.
    3. If one is looking to invest in a holding company, he would rather be better off investing in a good mutual fund with a long term track record- HDFC Equity/ Franklin Blue Chip , etc. By the way HDFC Prudence is
    a Balance Fund (Equity + Debt) and on a risk return ratio fares better than TCIL and given better returns as you have pointed out.
    4. Holding companies are biased towards their own group companies- Tata Investment/ Bajaj Holdings, etc

    • Manish Sharma says:

      Thanks, Mr. Chandrashekhar for putting your succinct but cogent views.

      It’s always a pleasure to read your comments..Always sound like words of wisdom to me..regards.

    • Indeed Mr. Chandrashekar! And that’s why one must always buy a holding company only at a big discount to NAV and/or intrinsic value. Thanks anyways for your invaluable inputs! Regards.

    • True Sir… The majority investments for these companies are in their respective companies…

  16. vishal,

    something wrong with the site? Not getting emails from the comment section although selected to be informed about follow up comments.

  17. had an idea …. don’t know if it is right or not.
    ….. what if we analyze individual securities and assets held by company …… do their valuation on per unit and then try to get !dea of intrinsic value ?!! what do i am thinking wrong…
    another assumption …… most of the items in safal inveshak check list got vifal over this company …… but they will work for individual securities held by company.

  18. Vipin Pandey says:

    Hi Vishal,

    I would like to understand if you make any changes to the weights of the 5 ratios while calculating the Altman Z Score?

    You have compared India’s 10 best and worst performing stocks by Altman Z score. All these companies are in different business. Did you use the standard formula for the Z score?

    Regards,

    Vipin

  19. Ravi Gupta says:

    Hi Vishal,

    I have been following your posts and really appreciate you spending so much time in preparing these reports which are so helpful to us and gives a very holistic way of approaching a stock. Most of the stocks whose reports you have published are overvalued after considering MOS. Would be glad to found some stock according to you which is undervalued and can be bought at this point in time 🙂

    Regards
    Ravi Gupta

  20. First of all great analysis ( i read up the post on BHEL also and it confirmed by own fair price of BHEL around 200:) . Looking forward to other posts

    Btw – Any good source for obtaining structured data for retail investors apart from moneycontrol and ET? I typically struggle with data sources while doing analyses.

  21. Maninder Singh says:

    Hi Vishal,
    I like your research and calculations. I simply hold stock until its PE ratio is less than or equal to its EPS growth ( Y on Y ) reviewed quarterly. it also works well.
    Is it ok or wrong.Please Guide.
    Thanks

  22. Hi Vishal,

    Fantastic analysis! Superb!

    I was wondering if it would be a good idea to calculate the current value of TICL portfolio and derive the expected NAV before it is declared by the company. After applying a discount, I think that we can spot whether the stock is mispriced or not.

    However, there are issues with this approach:
    1) The portfolio available is as on 31st March and there may have been changes in it. Do they declare their portfolio on a quarterly basis?
    2) The portfolio is huge and can be cumbersome to calculate its value.

    I would appreciate your views on this approach.

  23. chetan shah says:

    hi Vishal,very good analysis.can you research on below unquoted investment
    Tata Asset Management Ltd.(associate company) 5265457 shares
    Tata Capital Ltd. …………………………………………… 65102888 shares
    what is the percentage of tata capital that tata investment is holding

  24. chetan shah says:

    are there any chances that if tata forms a bank, then tata investment will be benefited

  25. Vishal,

    I like your simple style of analysis and also the explanation that you give for each section. I held this stock for almost 5 years and exited without any big profits and found it to be a value trap. Just few more points based on my experience
    a) While you have mentioned dilution of equity, it was diluted to provide warrants to the Tata group when there was no such need. They were afraid that someone may takeover this company, so they went ahead and issued warrant for themselves. They diluted at the cost of existing minority shareholders
    b) As clearly mentioned in their previous annual reports, they are more like a frond end company for tata group to manage various tata business and there is definitely a conflict of interest where they use the cash generated to provide loans to tata businesses as well as for raising capital. During the Tata Corus and JLR deals this company helped the other businesses. (please refer all previous annual reports for info and related party txns).
    I had the same high opinion about tatas being ethical but found it completely lacking in this business. This company is almost like a BSE200 or a BSE500 and one is better off holding these indices than hold this company because of the cost factors as well as corporate governance factor.

  26. Few points dissuade me from investing in this company.

    1. The management doesn’t seem to have any rational for each purchase or sale it makes. There is no mention in the AR about why these decisions are made. Without this, the company is no different from all the mutual fund managers out there. So don’t judge the company based on its past performance. The under performance is clearly visible if you go through the 2009-2013 performance.
    2. I would be comfortable if the manager shows a tendency to buy and hold companies instead of buy and sell at regular frequency. This can be judged from the fact that Godrej CP, which has demonstrated amazing ability to grow its top line and bottom line over the last decade has been sold out, probably because it is trading at high multiples.
    3. If I were the manager, I don’t think I have capacity to track 158 companies and make any meaningful decisions. If I were to read one annual report per day, that itself would mean nearly half of the year is gone to simply read and digest what these companies are reading.
    4. Excluding the taxes, the expenses easily works out to more than 5% of its income. If I were to look at this company as a mutual fund or a index fund, this cost is a big shackle for eating up any returns. An index fund with a low cost would be a better alternative.

    Disclosure: At one point in time, I had this company in my portfolio. But I don’t think I would have it again unless it was available at mouth watering level at some time in future.

  27. Hi Vishal,
    I recently checked the price of Tata Investment Corporation which is around 355-360 levels.
    Would the price of 355 be a good entry point for this stock?
    Just wanted to revisit the stock and analysis to check if the valuation and purchase price present a good opportunity.
    Feel free to share your thoughts, comments or suggestions on this.
    Thanks

  28. Vikas Bargale says:

    Hi Vishal,

    As always good analysis.

    In fact such good that for some time it made me forget what Prof. Sanjay Bakshi said about Holding companies.

    Please check the paras under Cash Bargains.

    I had previously invested in Bajaj Holdings , but sold out after his rational thinking about holding companies. So I personally think, as way Tata Inv. suffers form same bias. And no catalyst seen for its value unlocking.

    On the contrary, I am fearful if they invest in Tata’s new proposed airlines.

    Again personal opinion,
    Regards,
    Vikas

  29. Tata Inv Corp (TIC) is a slow-mover in terms of growth in profits or dividends, because of its very nature of passive investments in Tata group companies and other stocks.
    TIC’s business is not comparable to other companies which produce products or service or trade commodities.
    To put it in layman’s terms its a very boring stock. You will not see any news, developments, value unlocking, etc however, you can still expect positive/negative impact due to developments in Tata group of companies. Tata Steel is a good value buy but its a highly leveraged (high Debt Equity) play and quite risky for investors to bet or speculate on future deleveraging. Same story with Tata Motors. TCS is a debt-free company with solid profits and cash flows. Investors who cant buy Tata Steel and Tata Motors could actually buy TIC and get a Tata basket in one stock, but those who are expecting TCS-like performance will be disappointed.
    There are several pros and cons but considering the analysis above if the stock were to drop to 355-360 level and assuming the above assumptions/trends remain constant I think buying around those levels presents to buy with adequate Margin of Safety. Even if the stock does nothing for 1/2 years, you could see appreciation in book value as well as intrinsic value of the stock, and once the economic growth picks up you will be sitting on a solid investment which you dont have to worry about.
    Recently the stock came to Rs.355 levels or even below that presenting good opportunity to buy. After tracking TIC for last 2-3 months I did see the stock going below 350 barring few exceptional days. So the message is pretty clear that at 355 level its a good pick. I personally feel that the MOS takes care of the concerns and risks to an extent.

    Disclaimer: I’ve invested in TIC. Pls. do you own analysis before deciding to buy or sell.

  30. chanchal says:

    Which us better stock today?
    Bajaj Holdings or AB nuvo or Tata Inv.

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