What is a holding company?
It is the company that holds the promoter shareholding in group companies. The stake in group companies may either be a controlling stake or a minority stake but the value of these investments actually becomes the portfolio value of the holding company. Some of the most well-known holding companies are Tata Sons (the holding company for the Tata Group), Bajaj Holdings (the holding company for the Bajaj Group) etc. While Tata Sons is still a closely held holding company, Bajaj Holdings is listed and also traded in the markets.
India has a large number of listed Holding Companies (HoldCos) that hold shares of other listed and unlisted companies. A large part of the value of these Holding Co’s stems from their stakes in other businesses. Globally, Holding Co’ss trade at a discount to the underlying Net Asset Value (NAV) of their holdings. These discounts tend to range between 5-20%. Holding companies in India are unique because the Holding companies discount’s are exceptionally high, ranging from 50-80%. The quantum of the Holding companies discount varies significantly across companies and depends on multiple factors. These factors are not necessarily independent and often impact each other.
Past track record on Holding companies
In past we have suggested companies which are up significantly since suggested price such as Stel holdings, Tata Investment corp, Bajaj Holdings & Investments 3-4 times, Haryana capfin, Riddhi Siddhi Gluco, Andrew Yule, Elpro International and Recently suggested Vardhman Holdings among many others.
Why do Holding companies trade at a discount to their NAV?
- To begin, holding companies are typically evaluated based on the liquidation worth of their assets. However, this cannot be realised because the holding company rarely sells its assets in the group businesses. As a result, the market worth of such holding companies is theoretical rather than practical.
- Second, there is the critical issue of capital gains tax, which must be paid if the shares are moved. In any case, this reduces the actual value of the assets.
- Finally, internal rules prohibit the holding company from realising the worth of its shares, which is reflected in the reduced pricing.
- Also in many cases promoters are not shareholder friendly, meaning they do not wish to distribute part of their wealth among other shareholders. As a result the share price would be get stuck in a narrow range which would lead to the entire investment being dead investment.
Few points to keep in mind while investing in Holding companies
- Investors should understand the risks associated with investing in such companies. These companies are not intended for investment purposes; rather, they serve educational and exploratory functions only.
- Despite impressive financials and a high book value, there’s a possibility that the company may fail to generate significant returns for shareholders over time, rendering the investment futile.
- Investing in holding companies necessitates an extremely long-term perspective, ideally spanning at least five years.
Vardhman Holdings
Current Market price on the date of publishing this report-: 2918 Rs
Vardhman Holdings Ltd, founded in 1962, is a part of the Vardhman group. The company is a registered NBFC. Other than textile-related assets, the company’s assets mostly consist of investments. At the moment, profits come in the form of dividends on investments. The company’s current portfolio comprises of debt, equity, and real estate assets.
Vardhman Holdings investments consists of following
Current Market Capitalisation of Vardhman Holdings is 935 Crores, stock price is 2930 Rs while per share investment price is around 10,000 Rs.
Users need to understand the risk while investing in this type of companies as well as that, this type of companies are not meant for investing rather they are for exploring/educational purpose only. Despite amazing financials or high book value of the company, it may so happen that over a period company may fail to deliver any meaningful return for the shareholders thereby leaving it as dead investment.