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00:00 Joining us today is a very special guest, Vidit Shah of Spark.
00:03 The reason Vidit is joining us today is because it's been an interesting story for the last
00:08 couple of days where his report by Spark actually sparked a very sharp rally amongst Tata Group
00:14 stocks over the last few days.
00:15 Of course, then the weekend came and there were reports that Tata Sons may not be looking
00:20 at an IPO.
00:21 All that has led to some of these Tata stocks declining anywhere in the range of 8 to 10
00:26 percent.
00:27 So today, Vidit Shah of Spark joins us to help us understand what that report was, whether
00:31 or not an IPO from Tata Sons is likely and what can it mean for companies like Tata Chemicals.
00:36 Vidit, morning.
00:37 Thanks for joining us.
00:38 Vidit, I think you single-handedly led to enough and more excitement around those Tata
00:43 stocks where everyone picked up on the report.
00:47 The stocks have rallied.
00:49 Tata Chemicals is up 40 percent all of last week.
00:51 Some of the other Tata Group companies as well have done well on hopes of a Tata Son
00:57 IPO over the next 18 months.
00:58 I want us to take a step back and I want you to tell us what made you put out the report,
01:06 what led you to believe that an IPO from Tata Sons is likely at this stage.
01:10 And also, do you still believe that or do you think that is one of the scenarios that
01:14 could play out for Tata Sons?
01:15 Firstly, thanks for having me, Samina.
01:21 What led me to…
01:22 So there were a few reports that were published the week prior about the potential listing
01:28 of Tata Sons in a year and a half time.
01:35 And deep diving bigger, we noticed that there is a lot of value that one could ascribe to
01:42 the Tata Sons Group.
01:44 So we ascribed about 8 lakh to the group.
01:49 And well, to answer your question whether the IPO is the only way out, no, it isn't.
01:57 The RBI has classified it as one of several upper layer NBFCs and it's classified as a
02:05 coal investment company.
02:07 So the mandate is to list within three years of this identification, which was back in
02:16 September 22.
02:18 So that's one way out.
02:19 The other way out would be to restructure its group holdings and debt for it to not
02:25 be classified as an upper layer NBFC.
02:28 So those are the two primary options available to the group as of now.
02:34 Vidit, then what do you think is the more likely scenario to play out at this stage?
02:39 Well, that's difficult to tell.
02:44 So one, the advantage of listing could be to give exits to the non-coal shareholders
02:54 or the non-trust related shareholders.
03:00 But also, given that it's a conglomerate which makes several investments and given its capital
03:09 allocation that it keeps on doing, it could also potentially not want to list and have
03:15 the freedom to allocate capital in a way that they can think is too good.
03:24 Agreed.
03:25 And investors in the IPO are likely to give holding company discount of 30 to 60 percent
03:29 while calculating the equity value, which is probably not what Tata Sons may want at
03:33 this stage.
03:34 One of the big reasons that this Tata Sons IPO got so much of attention is because it
03:40 led to a very sharp rally among some of its group companies.
03:44 Tata Chemicals owns about 3-odd percent of Tata Sons.
03:49 The simple math on that is 33,000 crores of market cap.
03:53 They own about 20-odd thousand crores of Tata Sons.
03:58 Intrinsic value goes up much higher.
04:00 Do you think the only way to unlock value on Tata Chemicals is by the listing of Tata
04:09 Sons?
04:10 Yes.
04:11 As the report says, the 8 lakh crore value that we ascribe to Tata Sons, 2.5 percent
04:24 of that ascribe the 20,000 crore value to the investments that Tata Chemicals holds
04:29 in Tata Sons.
04:31 And that sort of comes to about 60-65 percent of today's market cap.
04:39 Now that itself lowers the intrinsic pay to a likely 11 to 12x of consensus rate estimates.
04:51 But the other companies that hold stake in Tata Sons are Tata Motors, Tata Power and
04:57 Indian Hotels.
04:58 And the value of their investments to their overall market cap is about 6-10 percent.
05:03 So yeah, Tata Chemicals is likely to be the biggest beneficiary of a potential listing
05:10 if Tata Sons were to list.
05:11 You know Vidit, you put out a very valid point on your report saying that cross-holding has
05:16 usually been a concern for investors for a while now and a simplified structure will
05:21 enable Tata Sons to have better control over the promoter votes on shareholder resolutions
05:27 as well.
05:28 Now we've seen what Chandra is doing.
05:29 In the last couple of years we've seen them simplify other group companies as well.
05:34 So while there are enough reasons why Tata Sons may not consider an IPO, there is enough
05:39 and more reason that this IPO if not today will become a reality eventually?
05:44 Well eventually, it's difficult to say because as long as the group continues to make forays
05:53 into new age technologies, there could be more and more capital that has to be allocated
06:00 to this.
06:01 So it's difficult to say when that eventuality will come and the street may, given the uncertainty,
06:09 may increase the holding hold code discount further if they don't see the IPO happening
06:17 in the near term.
06:18 So the near term creates a buzz, the near term IPO potential creates a buzz but you
06:25 could see the state increasing the hold code discount should the IPO be elongated.
06:31 Right.
06:32 Vidit, I know you don't track Tata Chemicals specifically but if this IPO doesn't go through,
06:37 in fact as that buzz has fizzled out this morning, you've seen some of these counters
06:41 take it to the chin.
06:42 Do you still feel like, I mean it's a what if case, I do understand that.
06:48 What does an investor do with Tata Chemicals at this stage?
06:51 Would you be able to have an opinion on that or that looks unlikely?
06:54 Because you are actually looking at it from a Tata Sons angle.
06:56 Yes, I'm sorry, I don't have an opinion on Tata Chemicals because we don't cover it.
07:03 But you know I can tell you that the value of Tata Sons is a significant portion of its
07:09 current market cap.
07:10 However, you know the sector itself is also facing headwinds as you would be aware as
07:16 well and the chemical industry has been under some pressure over the last year or so and
07:23 there is demand and realization pressures for Tata Chemicals based business.
07:29 So very lastly, there are some reports that are indicating that the Tata Sons in order
07:35 to avoid a skirt the IPO may look at having some of its businesses, they may move out
07:40 the financials into Tata Capital because that I believe also needs to be listed for the
07:44 upper limit NBFC.
07:46 Do you think those are the probable scenarios or outcomes that could be expected from Tata
07:52 Sons?
07:53 That's true.
07:54 So like I said at the start, right, that it has a couple of options.
08:00 One is to IPO, one is to restructure its group holdings and debt and that is one way that
08:07 they could do it is via transferring some of its debt and holdings to Tata Capital.
08:12 Only time will tell which route they choose to take because we've been hearing contradictory
08:19 reports as well.
08:20 So time will tell but should the company list, there is a lot of liquidity that is created
08:27 for its group company investments.
08:29 But for now, very lastly with it, you're still holding tall the report, right?
08:34 That still stands because everything that we are playing out is assumptions either made
08:39 by newspaper agencies, television channels.
08:42 Of course, what you have is data back reports that you're giving out.
08:46 Exactly.
08:47 So the report is on the assumption that it lists who the biggest beneficiaries could
08:55 be.
08:56 So that is likely to play out on the listing if at all that is to happen.
09:01 [Music]