SHOULD YOU HOLD 'HOLDING' COMPANIES?

By Ruma Dubey

Bombay Burmah Trading Corporation recently hit a new 52-week high at Rs.636. The stock price defies all logic when one looks at the financials -  for Q1FY17, its net sales dropped 3% (YoY) at Rs.63 crore and the company ultimately ended Q1 with a net loss of Rs.4 crore.  So why this kind of valuation?

Take a look at Bengal & Assam company. It is no plantation but is actually a Singhania group company, which operates as an Investment company and its main objective is to actually look into the financial investments of JK group. It is quoted at over Rs.1100 levels while it ended Q1FY17 with a net profit of less than even Rs.60 lakh.

Tata Sons is not listed but Tata Investment Corporation is involved in investing in long-term investments such as equity shares and equity-related securities, mainly in Tata group companies. TIC was promoted by Tata Sons in 1937 and went public in 1959, when it became one of the few publicly held investment companies listed on the Mumbai Stock Exchange. TIC, along with Tata Sons, promotes the Tata Mutual Fund. TIC’s top holdings are  Tata Motors, Tata Chemicals, Tata Steel, Trent, Titan Industries and Tata Global Beverages and these together account for half of its investment book.  It holds stake in Sun Pharma, Reliance, M&M and HDFC Bank and unlisted companies like Tata Sons and National Stock Exchange.

Maharashtra Seamless is quoted at around Rs.1500 and its market cap is at around Rs.1700 crore. It had ended FY16 with a revenue of Rs.9 crore and net profit of Rs.101 crore. It is its other income which boosts its bottomline. The company used to earlier make the Bajaj flagship scooters – Super and Chetak but it stopped this this 2006. Its main source of income, the ‘other income’ comes from the dividend it earns from its group company holdings.

As you may have guessed it by now, the common theme running around all of them is that they all are holding companies. And only by virtue of them being a holding company, they enjoy this immense investor fancy, high stock prices and market cap.

For eg: Maharashtra Scooters holds stocks of Bajaj Finance, Bajaj Auto, Bajaj Finserv and also of Bajaj Holding Investment Company. The value of these holdings currently stands around over Rs.4000 crore. Bombay Burmah is a 150 year old company, belonging to the Wadia group. Unlike many reports saying that Bombay Burmah holds 50.73% stake in Britannia Industries, a look at the latter’s shareholding pattern shows that it has no holding. Though what makes this company valuable is its 14.35% stake in Bombay Dyeing and huge tracts of realty it owns for the Wadia’s.

Bengal & Assam is a holding company of the Singhania’s - it holds big stakes in JK Lakshmi Cement, Fenner India, JK Tyre and JK Paper. The value of this equity holdings plus the huge realty holding is what makes this company attractive, nothing on operational performance at all.

The same is true for all holding companies like SIL Investments, Pilani Investments, Kalyani Investment,  Balmer Lawrie, Kesoram Industries , Nalwa Sons Investments – the holding company of the O P Jindal Group, with stakes in Jindal Saw, JSW Steel, JSW Holdings and Shalimar Paints. Williamson Magor is hugely fancied as it has major stakes in Mcleod Russel, McNally Bharat and Eveready Industries.

So why is that we are so enamored by these holding companies when purely on their fundamentals, they do not deserve their valuations? Actually, the investors in such holding companies look at it from the other side – the feel that they are getting a stock which holds stake in blue chips at a discounted price vis-à-vis the blue chips they hold. Thus they feel they are indirectly buying into a blue chip at a much cheaper rate. But what they forget is that the valuation of the investment that they see is only on paper yet the lure is that one day, value could get unlocked. And how will that happen? It is either through liquidation of holdings or a delisting of the company itself. It is really like buying into a close-ended mutual fund – income source is dividend income or liquidation income from holding companies.

Thus while buying into a holding company, it is essential to look at the ability of the companies held to increase dividend every year because only then will the holding company give you a higher dividend. And seriously, getting into a holding company is only and only about value unlocking – so we need to see if this could happen, if the promoter would divest shares- stagnant water gathers only moss and now dangerous mosquitoes.

Remember if the holding company holds large stake in fewer companies, be assured, there will be no value unlocking as most certainly it would be unwilling to sell stake. So the only satisfaction you can have is that of holding a company which holds blue chips. Yes, essentially a mutual fund!