Tata Investment Corporation 501301
May 08, 2015 - 12:02am EST by
2015 2016
Price: 567.00 EPS 0 0
Shares Out. (in M): 55 P/E 0 0
Market Cap (in $M): 503 P/FCF 0 0
Net Debt (in $M): 17 EBIT 0 0
TEV (in $M): 520 TEV/EBIT 0 0

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  • India
  • Holding Company
  • Sum Of The Parts (SOTP)


Summary thesis:
We are bullish on India due to (i) the leadership of Prime Minister Modi and Governor Rajan;
and (ii) lower oil price, which produces a double benefit of increasing domestic consumption and
investment and lowering inflation. The recent controversy over the retroactive AMT tax, which is not
applicable to foreign investors who invest in India after April 2015, has led to a 10% decline in India’s
stock market year to date. This provides a good entry opportunity as we believe this is a minor hiccup in
a long term secular bull market.
Tata Investment Corporation Limited (TICL) represents a diversified and discounted way to
invest in India and benefit from its bullish macro set up. TICL is an Indian investment holding company
that’s trading at a ~52% discount to its portfolio. Public Indian securities represent 87% of TICL’s
portfolio value. The discount to TICL’s portfolio has widened over the past year as the public portfolio
appreciated 39% while TICL’s stock increased only 28% over the same time period. Besides its
significant undervaluation, investors get to invest alongside a well-reputed family owner-operator
whose public equity portfolio has outperformed the general BSE Sensex index over the past 8 years by
6% annually; in addition TICL has a dividend yield of 2.9% vs 1.2% for the BSE Sensex. With reasonable
assumptions, we feel a better than 65% return on investment is possible over a 2 year period. We
believe TICL is similar to ideas like Softbank, Cheung Kong Holdings, and Naspers; these are holding
companies managed by good capital allocators and trade at a discount (~28% for Softbank, ~16% for
Cheung Kong, ~25% for Naspers). We like these companies as well and feel that over time these
discounts would disappear like it did for Berkshire Hathaway, which now trades at a premium of ~1.5x
book. Please note the average daily trading volume is ~35,000 shares ($350,000 daily turnover) so the
idea may not be suitable for large funds.
Macro backdrop on India
Below arsome of the reasons we are bullish on India and its stock market:
GDP growth: GDP is expected to grow 7.8% in 2015 and 2016 due to the combination of greater
infrastructure investments, increased consumer spending, and increased corporation investment. This
is up from 4.5%-6.0% growth experienced from 2012-2014.
Mandate by Prime Minister Modi to drive economic growth in India:
Modi’s party won India’s 2013 election by the widest margin in over 30 years. His previous initiatives as previous governor in the
Gujurat state include providing electricity to every village and improving the water grid infrastructure.
During his term in the 2000’s, Gujurat’s per capita income grew 7% while the national average was 5.6%.
Currently, Modi is removing excessive bureaucracy that have stalled numerous infrastructure projects;
these infrastructure investments will boost India’s GDP in the near term because these infrastructure
projects represents ~8% of GDP and over the long term as completed electricity, roads, water, railroad
projects make it easier to conduct business and invest within the country.
Budget deficit is expected to drop to 4% of GDP, down from 6% in 2012 and 7% in 2010. As an
importer of oil, India is benefiting from lower oil prices. Oil prices at $60 per bbl has reduced India’s
budget deficit by 1% of GDP. A lower budget deficit provides room for Modi’s government to be more
aggressive on fiscal investments.
Trade deficit: India’s trade deficit has improved YoY to 11 billion USD. India’s largest trade deficits
are with China, Saudi Arabia, Iraq, Kuwait, and Switzerland. India’s trade deficit will narrow with lower
priced crude oil imports, offset slightly by lower prices of its petroleum exports. India’s largest exports
are refined petroleum products, engineering goods, pharma products, and services (software and travel).
India is currently addressing domestic production shortages in certain sectors (i.e. iron ore with
China for India’s steel industry) to gradually reduce dependence on the associated imports.
Foreign exchange reservesIndia’s foreign exchange reserves increased to an all-time high of 344
billion USD in April 2015. These increased reserves will provide a buffer against potential capital
outflows when monetary policy normalization in advanced economics (US, Europe, Japan) commences.
Lower inflation: Under Raghuram Rajan’s leadership, the Reserve Bank of India has gained
credibility and curbed India’s inflation issues. Raghuram Rajan was previously the Chief Economist at
the IMF and was well known for his prescient paper at the 2005 annual economic summit in Wyoming
warning of large systemic shocks in the financial system. From 2008-2013, inflation in India skyrocketed
to 8-11%, dramatically higher than the 3-6% range experienced during the 2000-2007 period. After
Rajan became Governor in late 2013, inflation decreased to 6.4% for 2014. Now, the RBI is targeting CPI
inflation of ~6% for 2015-2016 and ~4% by the end of 2017-2018. Lower inflation provides consumers
and businesses with (i) greater confidence to make long-range plans and (ii) lower borrowing costs
which facilitates consumption of durable goods and improves the ability of corporations to invest.
DebtIndia’s debt to GDP ratio has fallen to ~67% due to strong economic growth as opposed to
other countries like the US and Eurozone countries like France where their debt to GDP ratios has
increased over the past years. Currently, India’s credit rating is BBB-/Baa3; Moody’s has raised India’s
outlook to positive, citing “structural advantages, relatively benign commodity prices and potential
improvement in infrastructure bottlenecks.”
Stabilized currencyWe believe the narrowing budget & trade deficits, strengthened foreign
reserves, low debt to GDP ratios, lowering inflation, and accelerating GDP growth will lead to a stable
and potentially strengthening rupee. During the inflationary period from 2007-2013, India’s real interest
rates fell into negative territory and caused the rupee to depreciate against the USD by ~32%. Lower inflation
allows the RBI to decrease its benchmark repo rates without hurting the rupee. Based on
current rates and inflation, India’s real interest rates are positive which should strengthen the rupee.
Finally, the RBI is implementing reforms that will lead to a fully convertible rupee. For example, earlier
this year the RBI allowed international institutions to borrow using rupee bonds. A fully convertible
rupee should improve the confidence of foreign investors and multi-national corporations in India.

 Improved consumer confidenceAfter Modi’s appointment as Prime Minister, the Nielsen consumer
confidence score in India increased from 112 to 129, near its all-time high. Indian consumers’
purchasing power has also increased due to lower oil prices
Consumer demographics: By inspiring optimism among India’s young population, Modi has
unlocked India’s structural “demographic dividend”. The young population is the engine of greater
consumer spending, a key component of GDP. To give a sense of the magnitude of India’s youth, India’s
dependency ratio is expected to be ~20% while all other major countries will have dependency ratios
above 40%. Second, its literacy rate has improved dramatically to 74% as of 2011 (world average is 84%)
from 50% in 1990 and is forecasted to improve in the future. The combination of optimistic and better
educated young Indians entering the work force will lead to significantly greater consumer spending.
Improved international relations: One example of India’s improved international relationships is the
collaboration of Modi’s government and Obama’s US administration. Most recently, Obama supported
India’s membership in a reformed UN Security Council and both countries have re-launched a Trade
Policy forum in which India has indicated its commitment to intellectual property rights in India. We
believe a favorable relationship between the two nations will lead to more foreign direct investments
India, another contributing factor to GDP growth. Additionally, relations between India and Pakistan are

Tata Investment Corporation

We believe Tata Investment Corporation Limited (TICL) is a cheap investment opportunity with a
large margin of safety. TICL trades at a 45% discount to its public equity portfolio and a 52% discount to
its total portfolio value. While TICL’s public portfolio has increased 39% over the past year; TICL’s stock
price has only increased by 28%, thereby widening the discount. The portfolio is diversified across
various industries and is representative of India’s economy, which benefits from a weak commodity
pricing environment. Additionally, TICL’s public equity portfolio has outperformed the BSE Sensex over
the past 8 years by 6% annually. Historical G&A expenses have been ~0.2-0.4% of TICL’s portfolio value,
which is good value for its capital allocation outperformance.
Company Background: Tata Investment Corporation Limited is a non-banking financial company; it
was promoted by Tata Sons Ltd., in 1937, under the name The Investment Corporation of India Limited.
It IPO'ed in 1959 on the Mumbai Stock Exchange. In 2008, TICL became a subsidiary of Tata Sons Ltd.
Tata Sons owns ~73.02% of TICL. Tata Sons is the founder and significant shareholder of the major
operating Tata companies (Tata Motors, Tata Chemicals, Tata Steel, Tata Global Beverages, Tata Power,
Indian Hotels, etc.) and 66% of Tata Sons is owned by philanthropic trusts endowed by members of the
Tata family.
Investment PhilosophyTICL’s investment philosophy is to “seek a combination of value and growth.
A company that exhibits growth characteristics, is well managed, has a sound position in its industry,
available at fair value according to conservative accounting norms is an ideal investment opportunity
for” TICL.
Situation Overview and Historical Track Record: Currently, Tata has an investment portfolio value of
67 billion rupees ($1.1 billion); 58 billion rupees ($950 mm) are in public Indian companies and bonds
and the remainder are in private companies. TICL’s current equity value is 31 billion rupees and its
enterprise value is 32 billion rupees ($520 mm). The discount to its portfolio value has ranged from a
52discount to 33% discount over the past 8 years (average discount has been ~44% to its total
portfolio.) The current discount is near its widest range; as mentioned above, TICL’s stock has not
increased proportionally to its underlying public investments’ increase.
Comparing TICL’s historical track record versus the BSE Sensex index, we note that TICL has
outperformed the BSE Sensex over the past 8 years. The 8 year CAGR for the BSE Sensex from 2007-
2015 is ~10% while the public portfolio of TICL generated an 8 year CAGR of 16%. Cumulatively, TICL’s
public portfolio has returned 230% while the BSE Sensex has returned 114%. Hence, we believe our
investment in TICL is in good hands as we wait (i) for the discount to shrink; (ii) for TICL to continue to
outperform the BSE Sensex; and (iii) collect a 2.9% dividend yield, which compares favorably to BSE
Sensex’s 1.2% dividend yield.
Unlike other holding companies in India which are concentrated in 1-2 companies, TICL is more
diversified; its investments span the entire spectrum of India’s economy; hence investors are not overly
exposed to a specific sector. Its largest company specific investments include Tata Chemicals; Titan
Company (jewelry and watch chain); Tata Motors; Tata Global Beverages; Voltas (engineering solutions
and AC unit manufacturer); and Trent (textile and bookstore). A short profile and summary financials of
the mentioned companies are provided belowThe largest portfolio weighting by value is Tata
Chemicals at 12% of its public portfolio value; in aggregate, the aforementioned companies represent
~52% of TICL’s publicly quoted portfolio. In terms of sector weighting, the largest sector in TICL’s
portfolio is consumer goods. Titan, Voltas and Trent trade at 16-20x 2016 EBITDA due to the positive
market sentiment on companies that would benefit from the rise of Indian consumers; all three trade in-
line with the consumer and retail industry. The other mentioned companies trade at reasonable
valuations (4-12x ‘16E EBITDA).  Among TICL’s private equity investments, the most notable are Tata Teleservices (formerly known as
Tata DoCoMo and the 7th wireless carrier in India with 64 mm subscribers) and Tata Capital, a bank that
serves commercial and consumer customers.
Lastly, investing in India requires strong local relationships and in-depth local knowledge. By
investing in TICL, investors are partnering with the Tata family, one of India’s best known business
families, and benefiting from their accumulated local knowledge of Indian businesses. This advantage
shows up in TICL’s historical outperformance against the BSE Sensex.
TaxesThe long-term capital gains taxes in India is 20% (cost basis is adjusted for inflation) while
taxes on dividends is 15%. The current book value of TICL’s investments is 390/share while the market
value of its investments is 1,220/share. Hence, the deferred tax liability on the capital gains is 166/share
and the after-tax value of its portfolio is 1,054/share.
Conclusion: We believe investors will generate an attractive return over a 2 year time horizon
through the following catalysts. First, the discount to TICL’s portfolio value narrows to its historical
average (from 52% to 44%), which generates a potential return of ~17%. With the discount at its
historical widest, the probability of it widening further is low. The discount also provides a margin of
safety if the Indian stock market drops. In 2009, when the Indian stock market declined sharply, TICL’s
discount to its public portfolio turned into a premium. Second, the NAV grows as the Indian stock
market appreciates alongside the improving Indian economy. Over the past 8 years, the Indian stock
market has appreciated 10% annually and its GDP has grown 6% annually. If India grows its GDP by 7+%
over the next two years, it’s reasonable to expect India’s stock market to grow at least ~10% annually or
better over the next two years. Third, TICL investors can benefit from a strengthening rupee as a result
of lower inflation which produces higher real interest rates. From 2005-2012, INR/USD traded between
45-50, reaching a low of 40 in 2008. With India’s strong expected growth and low inflation, a reversion
to 50 INR/USD would return ~24%. We would hold TICL in euro terms where we feel the prospects of
currency appreciation are even higher.  Fourth, two years of dividends would yield ~6%. In sum, an
investor in TICL can reasonably expect to obtain a potential return of over 65over a 2 year horizon.
  • Infrastructure investments are delayed
  • Corruption among Modi’s government is found, which reduces their credibility and lowers consumer confidence
  • Oil price rises back to $90+ / barrel which causes inflation to rise
  • Lack of rain that ruin’s India crop season, leading to higher food prices
  • Harsher capital gains tax for foreign investors are imposed which hurts market sentiment around India.
  • Tensions between India & China and India & Pakistan