Holding Companies

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)
Bharat Forge 3.5 2327.94 325.9116 1140.6906
BF Utilities 0
Hikal 7 164.4 50.964 356.748
Kalyani Steels 2 436.53 165.8814 331.7628
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.

Thoughts invited.


  1. #1 by rajapanda on October 15, 2011 - 4:02 PM

    How will you evaluate the holding companies which take that as a business. Like Tata Investment Corporation ?

  2. #2 by Kiran on October 17, 2011 - 9:14 PM

    Hi Raja,

    TIC is more like a close ended mutual fund, investing significantly in Tata Group of companies. I don’t think it will outperform the market – at best, it will give you returns in line with the broader market. If my hypothesis is true, then why TIC? Why not say HDFC Top 200 which gives an alpha over the broader market?

    • #3 by rajapanda on October 17, 2011 - 10:15 PM

      Hi Kiran,

      Thanks for your response. You make a fair point. But i think 2 points need to be taken into account here.

      1. For arriving at the conclusion that hdfc top 200 is probably better than TIC we we should make a comparison between a. growth in NAV of TIC + dividend payout Vs b. HDFC Top 200 growth scheme’s NAV in, say last 5 years ?
      2. TIC sells at a discount to it’s stated NAV. That’s a known, but what i find more interesting is during market madness (at least in 2008-09), the discount widens to much more than in normal times, giving a very good opportunity to a patient investor to acquire a good MF like portfolio with minimal risk.During 2009 crash it went to as low as 150 from highs of 790’s only to return to 700 again in 2010 and now ruling at 480’s.

      Would appreciate your viewpoints.

      Also, is it really a closed ended MF ? I mean no addition of new units is understandable. But we can buy and sell anytime, right ?


  3. #4 by Shankar on October 19, 2011 - 12:50 AM

    In most cases, these companies need a catalyst. I remember one we did during post-grad (aptly assisted by Prof. Bakshi) on Sundaram Clayton. Sundaram Clayton held 57% shares in TVS Motors. TVS Motors was valued at 5x and Sundaram Clayton at 2x. Plus there was a lot of news around TVS Motors most importantly their break down in ties (amicably) with Suzuki. TVS went up – but Sundaram went up even further and value was unlocked.


  4. #5 by Kiran on October 22, 2011 - 3:45 PM

    Hi Raja,

    a) yes, that would be a fair comparison (even then, I guess you come out equals, if not better with HDFC Top 200)

    b) This discount widening logic – not really sure Raja. I can make similar arguments to the DVR shares in the market, but when will that discount close in or is it set to fall further is something I have never been able to get my head around (or maybe its only known in hindsight). More probably, I need a little more education on these investments 🙂

    Yes, it’s not really close-ended in that you can buy and sell.

    Hi Shankar,

    I agree – they do need a catalyst and that can take a long time. I think I have read Prof. Bakshi’s interviews with capitalideasonline recently, and he does say that holding companies are not really a good bet with respect to effort-reward ratio. As I indicated in the blogpost, I’d be really comfortable holding, say Carborundum Universal rather than a pure holding company like Kalyani Investment Corp (similar to Sundaram clayton – TVS motors scenario).

  5. #6 by neerajmarathe on December 23, 2011 - 5:02 AM

    Yup, i agree with the valuation method..

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