DVRs Outperform Common Stocks

Differential voting right, or DVR, shares have not only outperformed their respective ordinary shares over the past one year, but have put up a strong performance in the three-year period as well. At present, the four listed DVR stocks are of Tata Motors, Jain Irrigation Systems, Future Retail and Gujarat NRE Coke. DVRs trade like ordinary shares, but because they offer limited voting rights, the stocks are not only traded at a discount but investors also get higher dividend payouts. These instruments were introduced in the Indian market around five years ago.

In the past one year, DVR shares of Future Retail have outperformed its ordinary shares by 123 percentage points. Similarly, at a time when the shares of Gujarat NRE, Jain Irrigation Systems and Tata Motors got heavily battered (-44 per cent, -3.5 per cent and -32 per cent, respectively), their DVRs managed to restrict the fall to -36.8 per cent, -1.9 per cent and -14.5 per cent, respectively. Interestingly, over the three-year period all three DVRs, except Gujarat NRE Coke, delivered positive returns when the ordinary shares continued their downward journey.

Says Rahul Rameshchand Jain, AVP -Investment Services, AnandRathi: "DVRs are a good investment option for retail investors who are not much concerned about their voting rights. They are delivering good returns at discounted prices. The instrument has also gathered popularity with more investor education."

Of late, the discount percentages of DVRs have also seen higher volatility. "The volatility is the result of the overall market volatility. It depends on demand and supply. When markets are volatile, demand shrinks. So long as there is no level-playing in derivatives, this will continue," says Kishor Ostwal, CMD, CNI Research. For instance, Future Retail DVR discounts were in the range of 10 per cent to 20 per cent in 2016, while Tata Motors DVRs that were at a discount of over 30 per cent in 2015, narrowed down to 24 per cent. "Globally, DVRs trade at discounts of around 15 per cent, but in India it moves between 30 per cent and 35 per cent. These discounts are expected to mellow down further," says Jain.

Tata Motors DVRs, which were listed on the NSE recently, are still maintaining lower volumes than the ordinary shares, but are expected to catch the fancy of stock investors. The one-year trading volume of Tata Motors was 980,000 compared to 180,000 DVRs, while Future Retail's share volumes traded at a one-year average of 250,000 compared to 9,989 DVRs. Similarly, traded volumes of ordinary shares of Jain Irrigation Systems were around 500,000 shares, compared to the average volume of 20,085 of its DVRs.

Whether the outperformance continues only time will tell, but the quality of business, management, and the valuation of the underlying stock will remain key determinants.