Tata Investment Corp

Investors with a two to three year investment horizon can consider accumulating the shares of Tata Investment Corp (TIC), the Tata Group's listed investment arm.

The stock is trading at a significant discount to the value of its investment book, which comprises mainly of Tata Group companies. TIC is a good defensive option with low volatility, as the stock's beta against the BSE 500 is 0.43. This, coupled with steep discount to the underlying book value, reduces downside.

The company's December 2009 Net Asset Value (NAV) per share was Rs 765. At its current market price of Rs 492, the stock is trading at a 35 per cent discount even to this NAV. This discount is likely to be wider today as the company's top holdings (Tata Chemicals, Tata Steel, Tata Motors, Tata Tea, Voltas) have appreciated further from their December levels, on the back of improved prospects.

The company also holds unquoted investments in Tata Asset Management and National Stock Exchange which may provide significant scope for value unlocking as they are captured at cost.

Portfolio looking up

According to the 2008-09 Annual Report, quoted investments made up 52 per cent of the company's total investment book. Equity shares constituted 51 per cent of the total investment book. The proportion of equity has come down from 62 per cent in 2007-08 due to the stock market meltdown. Rest of the investment book comprises debentures, mutual funds and preference shares. The company's top-10 exposures include Tata Chemicals, Tata Steel, Tata Motors, Tata Tea, Voltas, Tata Power, Trent, Indian Hotels and Titan.

TIC increased its stake in Tata Motors, Tata Elxsi and Tata Steel in 2008 when the market was beating down these stocks. In 2008, TIC raised Rs 440 crore zero-coupon convertible bonds with warrants through a rights issue, for long-term investment.

Since then, a turnaround in the global environment has led to improving prospects for some of these companies, resulting in their gradual re-rating. However, the TIC stock price has tended to lag those held in its investment book and is still far from the peak levels of Rs 900 a share in January 2008.

Higher dividend payout is also a key investment argument in favour of this stock with the stock's recent dividend yield at 6 per cent.

There is also potential for dividend payouts to be increased as the company may book profits on certain investments it holds. It may also receive higher dividends from companies, as the underlying companies' profitability improved over the last few quarters.

The company may get Rs 275 crore of additional funding in 2011 post-warrants conversion of the rights issue. These shares will be allotted on payment of Rs 400 a warrant, which is well below the current market price.