Tuesday, July 6, 2010

Investing in Holding Companies

One of the more popular 'theme' in the 'theme-based-investing' categories is investing in Holding Companies.
For the un-initiated, let me first explain in brief what this theme is all about...

  • There are some listed companies, whose main 'business' is to own and hold equity shares of other companies, most of which are listed group companies, run by the same management. 
  • Basically, instead of the individual promoters owning shares of all their group companies, all these holdings are held in a single company. This is called as the 'holding company'. (May or may not be a 'holding company' from accounting point of view.)
  • E.g. Bajaj Holdings and Investments Ltd. is the holding company of the Bajaj Group. It holds 31% stake in Bajaj Auto, 35% stake in Bajaj Finserv and 24% stake in Maharashtra Scooters, among its other investments.
So what is the 'accepted' logic for going about investing in such companies? Well, it goes like this...
  • Such companies hold shares of other listed companies. The market value of these investments (since they are also listed) will normally be higher than the value of investments shown in the books of the holding company.
  • In many cases, the market value of the holding company's investments (net of debt) is much higher then even its own market-cap.
  • So, investors argue that the holding company is undervalued, since it has 'assets' whose market value is greater than its own market-cap.

An example will clear this further;
Nalwa Sons Investments Ltd. (NSIL) is the holding company of the O.P. Jindal Group. It holds shares of Jindal Saw, Jindal Southwest, JSW Holdings and JSW Steel.
If one were to buy NSIL at current market-cap of Rs.500 cr, one would get investments worth Rs.2200 cr. Seems like 'buying a dollar for fifty cents' huh? 
This, precisely, is the investment argument that the believers in this theme of investing put forth. Further, while calculating the 'fair value' of the holding company, investors in general 'give' a discount to the market value of its investments. (The usual norm in the market is to accord a 50%-60% discount.) Thereby, fair value of NSIL should be about Rs.1300 cr (60% of market value of investments). Hence, at the present market-cap of Rs.500 cr, NSIL is a 'screaming buy'.

Now, while this logic seems reasonable, let me ruin your day by putting forth my thoughts on the same...
  • Strategic stake v/s financial stake: There are some investments which are financial in nature (to be sold later, preferably at a profit and make money.) There are other investments which are strategic in nature (never meant to be sold, but are meant to be held on and on, as part of some strategy.) Holding companies are created from the strategy point of view and their investments are necessarily strategic in nature. Holding companies stake in other group companies is in the nature of the 'promoter holding'. If this stake is sold, the group will lose control of the company. (In effect, it will never be sold)
  • Does market value matter??? Sooo, since the investments made by holding companies are strategic in nature, these will never be sold, but held on till eternity! So, if the market value is never going to be realised (by selling off the investments), should it matter? Should one even bother calculating the market value of the holding company's investments?
Please keep in mind that I am talking about only holding companies. If a company holds shares of an un-related listed company, the market value of these shares should be given due consideration, imho.

Well then how can these holding companies be valued?
  • In my view, these companies should be valued like any other business. Its revenue is the income it receives on its investments (dividend). Usually, expenses are limited and most of the revenue is reflected as the profit.
  • One can multiply this profit by a PE ratio accorded to a zero-growth company (e.g.Graham suggests 8.5 PE ratio) to arrive at the fair value of the holding company.
  • This is merely a suggestion and cannot be the only way to value a holding company. To each his own!
  • Further, investments other than those in group companies should be given their fair market value.
Of course, when one values holding companies like this, the resulting 'fair value' will be far farr farrrrr lower then the prevailing market cap, meaning that these companies should not be bought. Well, this happens to me all the time and till date, i have ended up buying only one holding company...

I am well aware that not everyone will agree with me. (In fact, i think most investors wont!). Valuation is an art and is very relative. The way I look at holding companies will not be the way you do!
But isn't that the beauty of investing? Well can all agree to disagree on certain fundas and still, all of us can earn money!! E.g. My good friend Ayush is a firm believer in the holding company investing theme (and I am not!) And i know it for a fact that he has earned a lot of money in this theme (and I have not!) Ayush, party-time dude!

As usual, the purpose of this post is to start off discussions on the topic. I do not claim that my views are right and others' are wrong...

Do pitch in your views on this theme..

Cheers and happy investing!!


sreenath vijayan said...

SIR, I AGREE.... to the fact that holding companies have holding in listed and un-listed companies.

in india the valuation for companies that are not listed are usually done by "pehchaan"!!!....as their promoters debt are not usually clear...
further we can see the positive side of it .....holding companies are also used in a way to invest in future sucess story companies ...like reliance has a habit of buying companies from entreprenuer's and merging it later (after 5 yers sort of)...and they also invest in OTC products.....WAYS OF MOVING MONEY to the target buying thats alll!!!!!!

Inquisitive Stranger said...

Hi Neeraj,

Very nicely explained, it would be interesting to see what other investors (readers) think about it, I dont have a thought on this as what i learned is what is a holding company from this post. Thank you, And yes, Superbbbbbbbb way of writing a post even if a person is reading this post will low intrest, the way you have written the post will make one concentrate and enjoy the post. i just loved this line "Now, while this logic seems reasonable, let me ruin your day by putting forth my thoughts on the same..."


Neeraj Marathe said...

Thnx Srinath..
Thnx inquisitive stranger..glad that u njoyed it :-)

sachin8778 said...

Nice post Neeraj, Thanks for sharing. I liked it since I have been thinking about these companies for past few months. I have small position in Tata Invest and Bajaj Holdings; and want to learn more about it.


sreenath vijayan said...

I came across an interesting thing when read about these types in net.......every holding company is subjected to different rules in different country like
For example

"China established new rules regarding foreign companies that set up holding companies as vehicles for investment in China. Under the new rules, such firms must have a total asset value of at least $400 million for one year prior to application or have already set up at least 10 foreign investment enterprises.

(reference:- http://www.referenceforbusiness.com/encyclopedia/Gov-Inc/Holding-Companies.html#ixzz0tFFR3u6O)

and there are different rules for liquidation for these types of companies in terms of
1)type of holding company(eg:-MFC<close holding company etc).
2) company decision on liquidation.
so during valuation these points can be considered for better clarification.....

Neeraj Marathe said...

hey sreenath,
nice to hear from u...good digging..
however, the 'holding' companies u r referring to are from the accounting and legal point of view (greater than 50% holding)..however, the 'holding' companies we r referring to may not be legally holding companies since they dont hold more than 50%..i had mentioned this in my post about these companies not being legal holding companies..
nevertheless, thnx for the info..it wont go waste!

Tortoise said...

Rightly said that Holding companies can't be valued based on the investments. In the Value Investing point of view, I agree with your point and may be one should avoid them as seems little upside but we should not ignore behavioral side of investing world in which lot of money can be made out of it :)


Neeraj Marathe said...

Well said Vipul..on the behavioural side, such themes do come n go...catch mkt fancy..and make money in the process..
hey that gives me an idea for a new post! :P

satish said...

Hi Neeraj,

There are many Holding Companies, the most blockbuster one was Jindal South west holding, went from 200 to 3000 than back to 300 then again to 1700 levels.

The other holding companies to watch out are Rane Holding, Tata Investments, Bajaj Holding etc.


ramki830 said...

Excellent points as usual Neeraj. Of course, bit like Ayush, I do believe in investing in holding cos at times (Selectively) more so because i have made money in past out of such themes (Chi Inv and tata investment co.)

Anycase, that is my 2 cent.

Some interesting holding cos that are worth observing IMHO are :

Sutlej Investments, Binani Industries, Williamson Magor.

Disc - I have vested interest in all three. Due diligence must.

Neeraj Marathe said...

Nice hearing from you Ramki..
and yes, one can make money in this theme, selectively, as u mentioned..
will take a look at Sutlej..its the only one i havnt looked at..

Raja said...

Lovely post!! cleared lot of doubts in my minds. Specially because Tata Investment is on my radar now. Looking at their annual report they seem to be invested in roughly 200 companies!! Would you like to put any figure to the fair value? Also seeking one clarification, why in your opinion should they be calculated like zero growth companies even if their profit(earned dividend) show a rise over the years ?
Will be very glad to hear your views.

Neeraj Marathe said...

I had opined about valuing it like zero growth companies, to be conservative..it builds in a kinda MOS while investing..dats jus my opinion, others may of cors disagree..
I dont track Tata Investment, so cant comment on the same..

Abhi said...

Hello Neeraj,

well.. i just read this blog article.
I agree on your point that even though the market value of the holdings of strategic holding company will be never be valued at their holdings market value, that is, it will always be undervalued in relation to its holdings.
Yet I am strong thinking of putting money in Bajaj holdings, because of 2 reasons
1)I like the way their holding companies are growing and in next few years and therefore relatively the holding company should increase in value and
2) plus relatively good div yield it provides and it will grow, IMHO.

To me a investment to arrive at its value or to reach a higher valuation needs a catalyst which could be any number of things and assessing probability of each catalyst is where the art of investment comes in.


Neeraj Marathe said...

Hi Abhi,
Yes, dividend is a major criteria..bajaj holdings does look like a very interesting case..

Tarun Talwar said...

Hi Neeraj,

Discovered your blog last week while researching a stock and thoroughly enjoyed the posts. Here are my 2 cents on holding companies:

1. When I go to stock market, I want to buy a business, not a company with static investments it has no intention to encash. The prices may go up or down based on stock market fads, however, you are not directly in a
"business" so the returns are left to chance.
2. Such companies are used by promoters to keep control on their group companies in the pyramid manner while encashing the maximum value below the risk (read takeover risk) threshold. Thus, there is no real business reason for creation and listing of these companies other than milking the market.

Hope you are enjoying current meltdown as it is creating terrific opportunities for value investors.


Neeraj Marathe said...

Absolutely agree with what you say Tarun, about holding companies as well as the depressed stock market. :-)

Jagdish Somani said...

Hi neeraj
Are u tracking Bengal & assam company, JK groups investment holding arm I have some 15K shares what should I do.

Neeraj Marathe said...

Hello Jagdish,
I am not tracking the same, do cant say really..

AJAY said...

I have just started looking at TIC and BIH, and I must say that I might disagree with a few of the points in the article.
While a strategic investment will probably never be sold, why should it not count towards the value of the firm? Wouldn't you say that a man is worth all his assets eventhough he might never plan on selling them? If a company has some 100 year government bonds exceeding its market cap wouldn't they make the company a bargain?
What might be wrong with this line of arguments? I would really appreciate the feedback.

Neeraj Marathe said...

Hello ajay,
thnx a lot for your comment. Yes, its fair that you disagree, mkt exists only coz thr r different views and opinions.
To continue ur anology of a man having assets, lemme ask you, would you count the mkt value of the house u reside in as part of ur networth? at least I wont..its something I will never sell.
In case of companies, if something is never going to be sold, how would shareholders benefit from it?
Its just a matter of how one views things. You r looking at just value, while my opinion is that value which cannot be realised has no value!!
hope this helped..

Unknown said...


Rohit said...

Hi Neeraj

It's a great learning experience to go back to the old posts on your blog.

Do you think it would be a better to value a holding company based on conservatively estimated intrinsic value of the investments? (assuming those are financial investments and not strategic)

Ofcourse this is easier said than done for something like TIC which holds stake in over 200 companies. However I still wanted to understand if this approach sounds right at least theoretically.

Neeraj Marathe said...

Hi Rohit,
If the investments are financial, i would surely value them at market price, minus a reasonable haircut.
Would also agree with your approach of conservatively valuing them.

Rajeev mundra said...

test.. comments not visible?

Neeraj Marathe said...

Highly visible boss!

Rajeev mundra said...

how is berkshire hathway valued?
is it mostly a holding vompany?

Neeraj Marathe said...

I have seen most people opine about Berkshire as though its an nbfc and should be valued at a multiple of book value.
I myself have no opinion on the same, never studied the financials of the company..

Unknown said...

Hello sir... I enjoyed and learnt while reading your post and also this http://stalwartvalue.com/is-vls-finance-a-deep-value-stock/. Sir, If Investors consider Equity Investing is all about part ownership whereby the Cash Flow and other fundamentals decides the Intrinsic Value. Now, if this is so, then what about Mutual Fund Investing? whereby they invest in the different different companies from the sectors.
Can we termed Holding companies as "Quasi Mutual Fund"??

InternetGURU says... said...

Here are a few more examples of Holding companies proving to be multi-multi baggers.....NBI Holding and Finance (recently got listed) and has been on a 5% freeze every day since listing. Bharat Nidhi and PNB finance are holding companies for Bennett Coleman (Times of India Group), though both the entities are not currently listed on BSE/NSE, investors are expecting them to very soon as very the SEBI rules which require companies listed on erstwhile regional stock exchanges to either list or buy-back their shares. You can find more such examples and rates on rareindianshares blog