MoneyVidya.com Blog Network

Tata Investment Corporation Limited (TATAINVEST) operates as an non-banking financial company. Its primary activity is to invest in long-term equity shares and other securities of companies in a range of industries. It is also engaged in management and distribution of mutual funds. TATAINVEST operates as a subsidiary of Tata Sons Limited.

One notable aspect that I personally like about TATAINVEST is its business model. This revenue and profitability comes from dividend income and profits from selling investments. Majority of its long term investments are in blue chip companies that have good cash flow and profitable businesses.

Trend Analysis

The whole reason for any business to exist is to generate sales revenue and make more profits. At a minimum, the parameters listed below should have continuously increasing trends. All the data below is based on last 8 years i.e. from 2001 to 2008.

• Revenue: Increasing trend with average growth of 22% (SDev. 21%). Neutral observation.
• Earnings per share: Increasing trend with average growth of 26% (SDev. 26%). This shows very high variability over last 8 years. Not a good observation.
• Net cash flow from operations: The net cash flow from operations has an increasing trend. For most part, the net cash flow is equal to reported net profit. Good observation.
• Profit/Loss from operations: The Corporation is showing consistently increasing profits from its operations. Very good observation.
• Reported net profit: Increasing trend. Good observation.
• Gross margins: Very stable gross margins. Historical average of 96% (narrow stdev. of 0.86%). Very good observation.
• Operating margins: Very stable operating margins. Historical average of 96% (narrow stdev. of 0.80%). Very Good observation.

Tata Investment Corporation Ltd: Data Trends

Quality of Dividends

In this part of my analysis, I am trying to understand dividend growth rate, consistency, and ability of the corporation to demonstrate sustainability. In is also an indirect way to gauging management’s policy vis-à-vis sharing the profits with common shareholders.

• Dividend per share: Chart 3 shows that consistently increasing dividend payments. However, it is flat for last three years. Neutral observation.
• Payout factor: This is ratio of dividends per share divided by EPS. It has been maintaining consistent at below 30%. This is an indication that management believe in sharing some percentage of profits with common shareholder. Very good observation.
• Dividend growth rate: In last eight years, dividends have grown at an average rate of 28%. This is little bit higher than EPS growth rate of 26%. Neutral observation.
• Ratio of cash from operations to reported net profit: This ratio is consistently at 1.0. Good observation.
• Ratio of profits from operations to reported net profit: This ratio is consistently around one. Good observation.
• Ratio of Cash from operations to total debt: This ratio is consistently more than one. In fact, the corporation can be considered practically debt free. Very good observation.

Dividend Cash Flow vs. Risk Free Savings Cash Flow

Why should I take risk if I can get a same or more cash flow by putting my capital into any risk free savings, fixed deposits, or any such risk free accounts? Therefore, I try to understand how dividends will affect my cash flow in 10 years of time period. The baseline assumptions are (1) the stock’s dividend yield is 3.6% at current price of Rs. 417.45; and (2) savings interest rate is 7%.

• Best case scenario: considering average dividend growth rate of 28% for last eight years, the dividend cash flow will be 2.65 times the cash flow from savings interest at the end of 10 years.
• Worst case scenario: considering low end of the expected dividend growth of 10%, the dividend cash follow will be only 0.66 times the cash flow from savings interest at the end of 10 years.
• In order to have equal cash flow (i.e. dividends = savings interest) in 10 years time period, the current yield should be 5.1% with average dividend growth of 10%. At this yield the buy price is Rs. 295.10.

Projected Beta-based Expected Return

I measured Beta for this stock’s risk (or price movement) relative to the S&P CNX NIFTY (or index movement). Here, I am trying to understand how a stock price behaves relative to the market and how to factor in the capital appreciation into my expected returns.

• The stocks three year Beta value is 0.54. This means this stock is relatively less volatile w.r.t. S&P CNX NIFTY index.
• The expected return is 11.6% relative to market index.
• Now factoring in 11.6% of expected return into the worst case dividend growth of 10% and current yield of 3.6%, the total cash flow is 3.07 times the savings interest rate.

Fair Value Calculation

I am continuing my analysis to estimate the fair value so that we can understand return characteristics for this investment.

• NPV price based on 15 year DCF: Rs. 687.7
• Average high yield price calculated based on past 8 years: Rs. 224
• Pricing relative to 8 year average PE ratio: Rs. 525.2
• Pricing based on PE ratio of 12: Rs. 615.9
• Graham number: Rs. 531.9

The range of fair value is calculated as Rs. 428.5 to Rs. 516.9

Qualitative Analysis

• I like TATAINVEST’s business model. Its revenue and profitability comes from dividend income and selling of its long term investment positions.
• It does not need large capital for its operating needs, expenses, depreciation, etc. For practical purposes, all of its cash flow can be considered as profits. This is reflected on Chart 2 above, where cash flow curve and net profit overlap each other.
• For all practical purposes, this is almost a zero debt company. I like this aspect of TATAINVEST.
• It has had a very favorable dividend strategy in which it consistently shared its profits with shareholders. The dividends have more than doubled in last 5 years.
• Considering the long term growth prospect of Indian economy, I believe TATAINVEST is very well position for future growth.

MoneyVidya.com) ” width=”421″ height=”193″ />

Summary…

I would like my personal portfolio to be model according to TATAINVEST business model. The philosophy of my income portfolio is similar to TATAINVEST, i.e. revenue and profitability from dividend income and selling my long term investment positions. The difference is I am a small time individual investor. However, I get motivated by the fact that this model works.

The table below shows the return characteristics of the investment scenario for next 10 years (Note: this return characteristic is relative to savings cash flow and relative to index performance).

Return Characteristics for 10+ year of Investments

I already own TATAINVEST. It continues to be attractively priced. Therefore, I would be willing to add to my existing position as long as my allocation level allows.

Full disclosure: I am long on TATAINVEST.

Disclaimer: This analysis is in the context of my long term investment philosophy. It is in line with my investment objectives and my personal risk profile. Please do your own research before making an investment decisions for TATAINVEST.

Tags: 501301, Tata Investment Corporation Ltd., TATAINVEST, TICL, TINV

This entry was posted on Wednesday, June 17th, 2009 at 9:12 am and is filed under MoneyVidya Blogger Network, Stocks. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.