I have been meaning to write about holding companies for a while now, but as usual my laziness has been overpowering. However, flipping through this fortnight’s Outlook Money pushed me into writing about this today.
Outlook Money has published the following 5 holding companies along with the details –
|Name of Company||Mkt Cap(cr)||Value of Investments (cr)||Div Yield(%)||Major Investments||Discount to Net value(%)|
|Kalyani Investment Company||217||1388||0||Bharat Forge, BF Utilities||84.37%|
|Maharashtra Scooters||363||1673||2.47%||Bajaj Auto, Bajaj Holdings and Inv, Bajaj Hindustan||76.10%|
|Nalwa Sons Investments||325||1193||0||Jindal Saw, JSW Steel||72.25%|
|Bombay Burmah Trading Corp||595||1953*||1.65%||Britannia, Bombay Dyeing||69.54%|
|Bajaj Holding and Investments||7934||22582||4.91%||Bajaj Auto, Bajaj Finserv||64.87%|
|* net of debt|
The article goes on to say that all these holding companies are at a huge discount and the discount has to correct itself in the future. The argument goes that even if say, Kalyani Investment Company quadrapules in 5-10 years, you have a 39%-18% CAGR depending on the time frame.
I have had mixed results with investing in holding companies and in general have come to a conclusion that I am better off not looking and studying these companies since the opportunity cost is a little high (Market might realise about undervaluation in such companies after a long time, if at all).
How do we value holding companies? In my view, there are two types of holding companies. One, its a pure holding company and two, it also has an operating business along with holding a chunk of shares in other companies (mostly in related industry segment).
Let’s take Outlook Money’s thoughts a little further. Let’s take the most undervalued of them all. Kalyani Investment company is a pure holding company (it got demerged from Kalyani Steels and holds 14% stake in Bharat Forge, 17% in BF Utilities and 31% in Hikal). A pure holding company receives dividends from its respective stock constituents and distributes to its shareholders/reinvests to increase stake in its constituents. So, in general, it should valued only by the dividends the shareholder receives. What if I as a shareholder don’t receive any dividends? How do I value that company then? If the company doesn’t have plans to liquidate its investments (if it did, then the huge undervaluation is justified), have not read any plans to distribute dividends – then on what basis should I invest in Kalyani Investment company?
One, I have no idea. And two, this huge undervaluation theory sounds bunkum to me as we have evaluate the firm only on the basis of the dividends we receive (liquidation I guess is pretty much out of question). Let’s calculate the intrinsic value of Kalyani Investment and Company. Bharat Forge on average has declared 175% dividend over the past 5 years (FV Rs. 2), BF Utilities has declared no dividends over the past 5 years, Hikal has declared an average of 70% dividend (FV Rs. 10) and Kalyani Steels has declared on average 40% dividends (FV Rs. 5).
So, doing some weighted average magic, we arrive at a dividend of Rs. 3.42 per share. Assume a little higher dividend, say Rs. 4 per share. Assume this dividend is perpetual. At 10% AAA bond rate, and post tax 7% bond rate, the price works out to about Rs. 60/-.
Calculating the intrinsic value as follows –
|Company||Div/share||No.of shares (in lakhs)||Kalyani Investment’s % shares (lakhs)||Kalyani Investment’s dividend (lakhs)|
|Sum of Dividends received||1829.2014|
|No. of Kalyani’s shares (lakhs)||43.65|
|Dividend per share||41.91|
So, dividend per share of Kalyani Investment and Company is Rs. 42/-. In the case where all this dividend is paid out perpetually to the shareholders, assuming 10% AAA bond rate and after tax rate of 7%, the value per share of Kalyani Investment and Company is Rs. 42/7% = Rs. 600 per share. The current market price is around Rs. 520. So, technically it is undervalued only by 15% (not much margin of safety mind you, because you don’t know whether dividends will be paid out) and not 85%.
The usual argument for holding companies is that the discount should not be more than 50% (although, I have had a hard time understanding the logic behind this number). Also, some investors say that in the West, the discount is not more than 10-20% and hence 85% undervaluation is huge. Well, in the West, the investors will force you to liquidate these investments for the payouts (and that’s due to better corporate laws out there) and hence the discount is 10-20% unlike in India.
Again, I have had mixed results with holding companies (luck?). I would not recommend buying or holding pure holding companies. What I do certainly recommend is to evaluate certain companies which have operating businesses along with holding significant chunks of other stocks. Some of these are Majestic Auto (hold Hero Honda shares), Sandesh Ltd. (hold Hero Honda shares), Carborundum Universal (hold Wendt India shares), EID Parry (hold Coromandel Int’l shares), Tata Chemical (hold Rallis India shares) among many others. Here, there are multiple catalysts – good operating businesses, liquidating some investments, buyout/takeover etc.
For those who are interested in the list of holding companies (pure as well as mixed), here’s one list.