Holding companies are trading at steep discounts to their investment value and can deliver good returns.
While the broader markets are trading at rich valuations and there are very few value picks left, investors can consider taking an exposure to holding and investment companies, which are trading at a steep discount to the value of their investments.
Though the primary sources of income for these companies are from dividends received from group firms and from sale of investments in other companies, there are some which get income from manufacturing or trading operations as well. Notably, most of them are debt-free. Even after we adjust for the debt, the discounts are still quite attractive.
These companies, says an Edelweiss Securities report, normally trade at a discount of 20 per cent to their net asset values. The discount according to Sushil Financial Services, is due to a lack of controlling stake and long-term nature of investment. However, the discount changes based on the movement of the markets. Says Pritesh Bumb of Sushil Financial Services, “Holding and investment companies trade at a higher discount (30 per cent) during bearish phases, but when the prices move up the discount typically comes down to 20-25 per cent.”
Analysts say, though these companies can offer good returns, investors must keep in mind the liquidity factor, loans to group companies and the investment portfolio.
We have highlighted three companies from the list of 11, which are reasonably liquid, have steady revenue streams and are likely to maintain dividends going ahead. In addition to the list mentioned, analysts also recommend FMCG player Kothari Products that has diversified investments valued at Rs 138 crore, Rane Holdings (Rs 200 crore) and Kirloskar Industries (Rs 640 crore).
| AT A DISCOUNT | |||||
| In Rs crore | CMP (Rs) | Value of portfolio | Market cap | NAV per share (Rs) | Discnt to NAV (%) |
| Bajaj Holdings | 945 | 22,075 | 10,030 | 2,083 | -57 |
| Tata Investment | 598 | 3,075 | 2,887 | 637 | -12 |
| JSW Holdings | 2,054 | 2,436 | 2,280 | 2,195 | -4 |
| UB Holdings | 328 | 6,411 | 2,196 | 971 | -66 |
| Binani Industries | 215 | 1,429 | 638 | 484 | -56 |
| Maha. Scooter | 420 | 1,818 | 480 | 1,595 | -74 |
| Balmer Lawrie Inv. | 157 | 667 | 349 | 302 | -48 |
| SIL Investments | 140 | 597 | 148 | 569 | -75 |
| Majestic Auto | 130 | 292 | 135 | 281 | -54 |
| Uniphos | 52 | 521 | 134 | 208 | -75 |
| Williamson Magor | 68 | 471 | 75 | 432 | -84 |
| Source: Analyst reports, companies | |||||
Bajaj Holdings & Investment
The investment holding company was demerged from Bajaj Auto two years ago. It holds major stakes in Bajaj Auto (31 per cent), Bajaj Finserve (35.6 per cent), Bajaj Electricals (16.9 per cent), Maharashtra Scooters (24 per cent), and Force Motors (19.5). The value of these investments as well as in other companies is Rs 22,000 crore, while the market cap of Bajaj Holdings is Rs 10,000 crore. The stock is available at a steep discount of 55 per cent.
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Given the strong balance sheet (and zero debt), dividend yield (over 3 per cent) and attractive discount, Edelweiss has set a target of Rs 1,182 — an upside of 26 per cent from current levels.
Tata Investment Corporation
The company has stakes in Tata group companies including Tata Steel, Tata Global Beverages (formerly Tata Tea), Voltas, Titan Industries, Indian Hotels among others, and these intergroup stakes constitute over half of its total investment value. In addition to the Tata group, the company also has exposure to listed entities like NTPC, BHEL and SBI with investments in companies spanning over 20 sectors.
Given the dividend income it generates and its record in the recent past, the dividend rate is likely to be maintained with the current dividend yield at 2.5 per cent. The company has been using the higher prices in the market to dilute a part of its investments, which coupled with income from debt instruments enabled it to increase its 2009-10 income by 10 per cent to Rs 233 crore. At the current market price of Rs 586, the stock is trading at a discount of 11.5 per cent to its net asset value per share of Rs 637. Given the consistent dividends and marquee investments, this would be a good pick for your portfolio.
UB Holdings (UBHL)
The company has controlling stakes in UB group’s key listed companies: United Breweries, United Spirits and Kingfisher Airlines. In addition, it has major stakes in Mangalore Chemicals and Fertilisers and UB Engineering. Further, the company also exports alcohol, footwear, apparel and processed foods through a group firm UB Global. It also has an exposure in real estate through a joint venture, UB City, which fetches it an annual rental income of Rs 34 crore.
While the UB Holdings clocked revenues of Rs 91 crore in the September quarter, the value of its investments is pegged at Rs 7,500 crore. Considering its market cap of Rs 2,184 crore and standalone debt of Rs 1,500 crore, the stock is trading at a steep discount of about 50 per cent. With prospects of various key companies looking up (barring Kingfisher which has debt issues to resolve), expect the value of its investment to rise in the longer term. Expect a return of 30 per cent from these levels.