We have always heard of Holding Companies making news in the market. This Article covers in depth what a holding company is and whether it makes for a good investment.
Old-timers will recollect that in January 2017, Porinju Veliyath had recommended that we buy the stocks of holding companies.
theory was simple, namely, that these stocks are quoting at a steep discount in
relation to their intrinsic value and this discount is not sustainable for
Even a small narrowing of the discount from 75% to 50% will result in a doubling of their valuations, he explained.
What are Holding Companies?
Holding Companies as the name suggests are companies which do not provide any goods or services as a entity itself but rather they just hold shares of other listed companies. Thus the value of a holding company is derived from its underlying holdings.
Here are some holding companies in India and the discount at which they are trading –
You can notice the heavy discount at which the stocks are trading. To put things simply the underlying shares value they hold is 100 Rs, but they are quoting at only let’s say 20-30 Rs. A question arises, Why?
Here’s why –
Those underlying shares of holding companies could be sold in the market, sometimes three to four times the current market value of the whole company and it’s very easy for value investing practisers to say to conclude that the shares are cheap and are good value buys.
But should you buy it? That depends on the presence or absence of a catalyst. How likely is it that that cheapness will go away? For that to happen they have to sell the shares and distribute the dividend, they have to have massive buybacks or have to liquidate the company. If none of those things are going to happen, then the probability of the value being realized is low, and this overhang is the reason for holding companies to trade at discount.
The below image shows the holding companies’ portfolio i.e. the shares of listed companies they hold in detail –
Just to explain one holding company – we take up Summit Securities which is the holding company of the Harsh Goenka group with a stake in powerhouses like KEC International, Zensar, and Ceat Ltd.
From the very first image we can see that it trades at a 75% discount!
So finally the Golden Question? Are they a worthwhile investment?
It is said and noticed that the gap between holding companies’ underlying portfolio value and the holding company’s value reduces in Bull Runs from 70-80% to 40-50%.