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, Nalwa sons, Kalyani Investments, Dhunseri Investments, Elpro International, Vardhman Holdings etc 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.
Introduction
Kama Holdings, established in 2000, is the parent company of SRF Limited, holding a majority stake of over 50%. With its small equity base Kama owns more than equity shares of SRF, translating to valuation of over 34,000 crores rupees. The holding company trades at a significant discount to the intrinsic value of its investments.
Controlled by the Arun Bharat Ram family, Kama Holdings operates as a Core Investment Company (CIC) with diverse interests spanning education, real estate, and investment through its wholly owned subsidiaries: Shri Educare Limited, Kama Realty (Delhi) Limited, and SRF Transnational Holdings Limited. SRF Limited, its flagship subsidiary, is a global leader in technical textiles, specialty chemicals, and packaging films, with operations across India, Thailand, South Africa, and Hungary, and a commercial presence in over 90 countries.
Kama Holdings has historically delivered impressive returns, outperforming SRF during periods of high holding company discounts. Between 2015 and 2020, when the discount peaked at 80%, Kama’s share price compounded annually by 34%, compared to SRF’s 23%. However, during periods of lower discounts, SRF has shown stronger performance. The company also benefits from its substantial cash reserves and other investments, further enhancing its intrinsic value.
Despite these advantages, investing in Kama Holdings comes with certain risks. The company’s financial performance is closely tied to SRF’s growth, and any consistent decline in SRF’s earnings could significantly impact Kama. Stake dilution is another potential concern, with Kama’s holding in SRF declining from 50.69% in 2023 to 50.21% in 2024 due to equity sales. Additionally, dividend payouts, which have historically been consistent, could be impacted if Kama pursues new ventures.
SRF Limited, Kama’s subsidiary, has demonstrated robust growth over the years. With a five-year revenue and profit CAGR of 14% and 18%, respectively, and a compounded annual share price growth of 36%, SRF remains a leader in its sectors. However, its high price-to-earnings ratio of 60 makes direct investment less appealing, positioning Kama Holdings as an attractive alternative for investors seeking exposure to SRF’s growth at a discounted valuation.
SRF
SRF Limited, a subsidiary of Kama Holdings, is a multi-business chemical entity specializing in the manufacturing of industrial and specialty intermediates. Renowned globally for its R&D capabilities, particularly in niche chemical domains, SRF is a market leader across multiple business segments in India and maintains a strong international presence. The company operates in four countries—India, Thailand, South Africa, and Hungary—and has commercial interests spanning over 90 countries. Its operations are divided into four primary segments: Technical Textiles Business (TTB), Chemicals Business (CB), Packaging Films Business (PFB), and Other Businesses.
SRF Polymers Ltd was established following the demerger of three businesses—Engineering Plastics, Fishnet Twines, and Polyester Films—from SRF Limited, effective January 1, 2001. The Engineering Plastics segment serves the nylon engineering plastics needs of industries such as automobiles, white goods, electrical goods, telecom cables, textile machinery, and electronics.
The Polyester Films segment focuses on products used in industries such as packaging, metallizing, cable manufacturing, and hot stamping foils. To support its Polyester Films business, SRF has established a new facility in the Export Promotion Zone in Indore, Madhya Pradesh, expanding its production capacity to 25,000 tonnes per annum.
Investments
Kama Holdings currently holds a 50.21% stake in SRF Limited. As of December 15, 2024, SRF’s market capitalization stands at ₹68,080 crores, valuing Kama’s stake at approximately ₹34,040 crores. In contrast, Kama Holdings’ market capitalization is just ₹8,000 crores, reflecting a steep 76% discount to the value of its holdings.
This significant discount is further underscored by Kama Holdings’ additional assets, including investments in mutual funds, subsidiaries, and cash equivalents. The discount is anticipated to narrow to 50% ahead of a potential call auction announcement by the Bombay Stock Exchange, which could drive Kama’s share price to around ₹5,000. Furthermore, the possibility of a merger between Kama Holdings and SRF could provide substantial benefits to Kama shareholders, potentially unlocking the full value of their holdings in SRF.
Recent announcements by SEBI
The Securities and Exchange Board of India (SEBI) has recently introduced significant reforms in the delisting regulations for companies, particularly for holding companies, to address the long-standing issue of their shares trading at substantial discounts to intrinsic value. These changes aim to provide more streamlined delisting processes and better price discovery mechanisms.
SEBI’s new framework includes the introduction of a fixed price delisting process alongside the traditional reverse book building (RBB) method. Under the fixed price process, promoters can acquire public shareholding at a minimum of a 15% premium over the floor price, determined using specified metrics such as historical acquisition prices and adjusted book value. The RBB process has also been revised to reduce the counter-offer threshold from 90% to 75%, provided at least 50% of the public shareholding is tendered. Furthermore, investment holding companies are required to have at least 75% of their fair value in direct investments in listed companies to qualify for delisting, with the delisted companies prohibited from relisting for three years.
These regulatory changes could have a notable impact on Kama Holdings Limited. As a holding company with a substantial stake in SRF Limited, Kama trades at a significant discount to the intrinsic value of its holdings. SEBI’s reforms, particularly the fixed price process and special call auction mechanism, could facilitate more accurate price discovery and potentially narrow this discount. This creates an opportunity for Kama’s market valuation to align more closely with its underlying assets’ worth, unlocking shareholder value. Additionally, the revised regulations make it easier for promoters to take holding companies private, which could be an eventual strategic move for Kama, benefiting its shareholders.
Overall, these reforms represent a crucial step towards enhancing transparency and efficiency in the valuation and delisting of holding companies, potentially unlocking significant value for investors in entities like Kama Holdings.
The exact impact of the recent announcements remains uncertain, as further details are awaited for a comprehensive analysis. However, if the valuation gap between Kama Holdings’ intrinsic value and its market capitalization narrows, it could lead to a significant increase in the company’s market value.
Conclusion
Kama Holdings, a 24-year-old company holding over 50% of SRF Limited, is engaged in managing investments across various sectors. The company trades at a significant discount to its holding value, with its stake in SRF alone valued at over ₹34,000 crores, while Kama’s market capitalization is just ₹8,000 crores. While holding companies typically trade at a discount, any reduction in this valuation gap, as seen in recent regulatory reforms, could create a substantial impact on shareholder value. If the discount narrows, Kama’s market value has the potential to align more closely with its intrinsic worth, unlocking significant upside for its investors.