Faced with a choppy market and prolonged downturn, investors are looking for safer bets in the equity market.
As an investment theme, holding companies are becoming a favourite among retail investors for their ‘lower risk with consistent and higher returns’ perception.
Many experts now recommend holding company stocks like BF Invest-ments, Bajaj Holdings, Kalyani Investment Company, JSW Holdings, Nalwa Sons Investments, Maharashtra Scooters and Pilani Investment Industries Corporation.
An analysis shows ‘year to date’ returns are relatively high for holdcos. While the Nifty has gained about 10 per cent this year, some holding companies have exceeded this return. For instance, BF Investments, the holding company for Bharat Forge, has returned at 34 per cent YTD, Bombay Burmah Trading Company, or BBTC, has given 15 per cent and Bajaj Holdings has given a return of 14 per cent.
Interestingly, companies under BF Investments, like Kalyani Steel where it has 39 per cent stake and Bharat Forge with 3 per cent stake, have given negative returns YTD.
The case is similar for Bajaj Holdings. Group firms Bajaj Auto and Maharashtra Scooters have given negative YTD returns of –9 per cent each. Bajaj Holdings has 55.9 per cent and 24 per cent stake, respectively, in the two companies.
Investors are increasingly looking at holdcos, as steep valuations of fundamentally strong stocks have narrowed the already tight band of optimal and safe investment equity options.
Market commentators, like Ambareesh Baliga, are often upbeat about holdcos. “Whenever markets are looked at as an investment option, investors unsurprisingly begin scouting for the stocks with the best returns. Thus, begins the search for the ‘perfect stock’ that delivers the magical formula. Although anybody who has been an investor would tell you such a magical formula is just that, ‘magical’; not to be found in the real world of investing, unless we consider investing in ‘holding companies,’ which come close to the formula,” says Baliga.
Holding companies, as the name suggests, are the entities that hold the shares of various other operational companies within the group umbrella.
As part of corporate restructuring, corporate houses have hived off operating companies within the group into separate companies and recast the parent company into a ‘holding company’ that owns substantial stake in the group companies. A holding company, by its sizeable investment, is a promoter entity of the subsidiary or associate companies. It has no say in the ‘day-to-day’ management and operations of the group companies.
These companies have traditionally traded at a discount of 20-90 per cent to the operational companies. Most of this discount in the past years can be attributed to low liquidity, reduced accessibility to information and low float in the market due to high promoter stake with dismal intent to monetise. In the past, promoters of holding companies notoriously hived off investments into separate companies, gaining complete control of those companies at highly discounted prices. Also, these holdcos were listed mainly for doing financial transactions by the promoters and to avail of long-term capital gains benefits.
However, all the ambiguity and uncertainty in dealing with holding companies have changed for minority investors with the enactment of the Companies Act 2013.
Clauses on related party transactions with specific emphasis on voting by promoter entities as well as introduction of measures for legal recourse against mismanagement have empowered minority shareholders and starkly reduced the promoters’ arbitrary powers. Recent guidelines on capping promoter stake have resulted in compulsory reduction in promoter holding to 75 per cent, leading to higher float. Increased float has led to greater trading volumes and activity, which in turn have generated interest in holdcos as a good investment option to consider.
“Investing in a holding company with strong promoter credentials is akin to investing in a mutual fund. With holding company invested across sectors through their group subsidiaries/companies, the sectoral risks are somewhat reduced. In case of any sectoral hurdles faced by one subsidiary, its investment in other sectoral businesses would compensate for the loss,” says Baliga.
Any mutual fund investor would look for diversification, reduced risk and sustained returns, quite similar to any holding company. There are still opportunities left to be captured in holding companies that trade at attractive valuations.
But investors have to be choosy and go strictly by the management track record in maintaining high corporate governance standards. In this context holdcos like Bajaj Holdings Investment, BF Investment, Kalyani Investment Company, JSW Holdings, Nalwa Sons Investments, Maharashtra Scooters and Pilani Investment Industries Corporation are often mentioned in stock recommendations. Although many of these holdcos are available at attractive discounts compared with the value of their underlying companies, their portfolios are skewed in favour of one subsidiary. For instance, Kalyani Investments is available at 80 per cent discount, but Bharat Forge accounts for 81 per cent of its portfolio. Nalwa Sons too is available at a steep discount of 74 per cent but JSW Steel alone accounts for 76 per cent of its portfolio.
Though Maharashtra Scooters is available at 70 per cent discount, it is not a holding company in the strict sense of the term, as its stake in each of the invested companies does not exceed 4 per cent. The discounts on Bajaj Holdings stand at 49 per cent and on BF Investments at 53 per cent. Pilani Investment, holding company for the Birla Group, is available at 73 per cent discount.
However, analysts say small retail investors should be cautious while buying holding company shares on the premise that they are getting the underlying business entity at a discount. But low liquidity and the wide spread in bid-and-offer price are critical risks in such stocks. The holdco doesn't derive any direct benefit from the rise in fortunes of the underlying business except only to the extent of dividends received, and that too are given only after apportioning costs. They derive value based on a notional rise in the share prices of business units. But when the stocks of these business units take a knock, holdcos suffer severe erosion and generally always trade at significant discount.