Holding Company Discounts

by puneinvestor

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A holding company, for purposes of our discussion here, is a company which doesn’t have any significant operating components and exists primarily to hold investments in other companies inside or outside the promoter group. Holding company discounts exist in India. Why they do, how much they should be and why they fluctuate over time for the same company are subjects of unending debate. These are questions that don’t yield definitive or formulaic answers.

I’ve put together a snapshot of holding company data after selecting companies which fit the following criteria (this is not intended to be a comprehensive list):

  • Should not have operational components of significance
  • Most of the holdings should be listed so that the Net Asset Value (NAV) is relatively valid
  • Should be of relatively meaningful size
Company NAV Market Cap Discount
Bajaj Holdings & Investment Ltd. 23875 9,020 62.2%
Balmer Lawrie Investments Ltd. 565 333 41.1%
BF Investment Ltd. 1042 168 83.9%
Dhunseri Investments 166 36 78.1%
Jindal South West Holdings Ltd. 1770 828 53.2%
Kalyani Investment Company Ltd. 1576 180 88.6%
KAMA Holdings 729 250 65.8%
Kirloskar Brother Investments 1464 410 72.0%
McDowell Holdings Ltd. 644 59 90.9%
Nahar Capital & Financial Services Ltd. 388 73 81.2%
Nalwa Sons Investments 1496 387 74.2%
Pilani Investment 3589 1,208 66.4%
Rane Holdings 272 286 (5.0%)
STEL Holdings 153 24 84.6%
Tata Investment Corporation Ltd. 4186 2,452 41.4%
United Breweries (Holdings) Ltd. 3935 446 88.7%
Vardhman Holdings Ltd. 419 126 69.8%
Williamson Magor 364 47 87.1%
Average 68.0%
All figures in rupees crores as on March 31, 2012. Quoted assets at market value. Unquoted assets at book value. NAV = Quoted assets + Unquoted assets – Liabilities. Sources: FY12 Annual Reports, BSEIndia.com. Tools: finance.google.com, screener.in.

The table above prompts the following observations:

  • Many of the discounts are significant
  • Rane is the odd man out, perhaps there is a good explanation
  • KAMA and Balmer Lawrie hold just one company each
  • UB Holdings has probably undergone significant change in status since March 31, 2012

The usual explanations for the discounts are:

  • Owner/management qualities (trustworthiness, competence, etc.)
  • Exclusive benefits of control to owners/managers
  • Lack of liquidity of either holding co. shares or quoted asset shares
  • Valuation should be based only on cash flows, i.e. “sales” and “profits”
  • Tax implications

Most explanations, excluding management shadiness, are not convincing enough for a 50%+ discount. For example, no one in India values real estate based on cash flows, so what’s the big deal with holding companies? However, since the market is clearly applying hefty discounts, I would buy shares in a holding company which was cheap and had decent prospects only if there was a fair dividend buffer. That way, you get compensated while waiting for price appreciation, and there might be some icing on the cake if an unexpected good event like a demerger occurs, forcing the discount to reduce.