Capital
Market : Holding Companies
Alex
K. Mathews, Research Head
Holding companies are companies which own shares of another
group company or groups of companies. Usually
holding companies hold stocks with voting rights to control its board of
directors, inorder to control its policies and
management. Sometimes companies will
hold both equity shares and preferential shares. Preferential share holding will not fetch
voting rights, but will get dividend and enough rights over the assets. Traditionally these stocks hold a low
valuation, despite the market value of their investments in group companies
being significantly higher. The main
reason for this low valuation is the fact that the investments are essentially
on paper. The income generated from
these companies is from the dividends paid by the subsidiary companies for
holding their stocks in the portfolio. There is no actual cash flow from their
ordinary business operations. Thus, holding
companies shares do not reflect the market value of the subsidiaries. Most of
the time holding companies shares are available at a discount to their NAV.
Holding companies sometimes unlock the value either by way
of the listing of subsidiaries or their sale to a strategic partner, or by a de-merger. If the holding companies do not have any
intension to unlock the value, then it is better not to invest in these holding
company stocks. Sometimes there can be
inherent risks in investment for holding company stocks, because a particular
company’s management may be very good at handling some certain business, while
not being able to deliver good performance in some other businesses. Highly diversified subsidiary companies could
affect the overall valuation of the holding company. These risks can be minimized if the investor
finds out those companies which are focused in a core sector, rather than
putting it in one holding company.
The highest risk an investor has to face while investing in
holding companies are multiple. The biggest risk is the time period an investor
might have to hold on to such investments before he gets rewarded by one of the
value-unlocking action of the management as mentioned earlier. Apart from that,
the profits from the appreciation of stock price can only be expected if the
subsidiaries are doing extremely well and the investments in its other non-listed
ventures are prosperous. In the below given list of companies, Bajaj Holdings stock price has not come down considerably
from its higher levels because of the performance its subsidiaries are putting
out. While in the case of McDowell Holdings, the stock which made a high of 400
levels is now around 40, Jindal South West Holdings
made a high of 3300 levels is now around 424 and Network 18 is now around 43 when
compared to its high of around 630. So investors should give due consideration
while investing in holding companies as appreciation in its stock price would
happen only if a demerger/public listing happens or
the subsidiary ventures are reaping good profits.
In the January Geodata issue, we may discuss in detail about
the different holding companies in