Of late, many holding companies or companies holding shares of other listed and unlisted firms, have come into the limelight. In many cases, the value of investments these companies hold in their books is higher than their current market capitalisation. While some are pure investment players, others operate businesses as well.
A look at the BSE 200 index and relevant data suggests despite the run up in share prices since the start of 2012, many such companies are still available at below the worth of their investments and businesses.
Pure investment plays
Among pure investment plays, considering they do not have any other business activities, investors in these companies benefit as a result of appreciation in the value of investments and dividend distribution, which is why they are also considered good dividend play. Tata Investments is one such example. It has investments in almost 150 companies, including some key Tata Group firms. For FY11, the company reported a dividend income of Rs 58.65 crore, about 2.4 per cent of the current value of these investments at Rs 2,328 crore. During FY11, the company reported a net profit of Rs 199 crore and paid dividend of Rs 77.2 crore. Backed by strong management, the company has a consistent record of dividend payment. Though the discount (difference between value of its investments and market capitalisation) is not much at 10 per cent, at the current price of Rs 439 the stock still offers a healthy dividend yield of over three per cent.
However, there is more value in the case of JSW Holdings. The cumulative value of its investments at current market price of the respective companies works out to Rs 1,473 crore. The company does not have other assets except net current assets worth Rs 127.52 crore. The total value of the two works out to Rs 1,578 crore, almost twice its current market capitalisation of around Rs 865 crore.
The company, however, does not have a dividend history and its income from dividends is also relatively less (Rs 16.88 crore in FY11, worth just one per cent of its current value of investments). Its investments in group companies like Jindal Steel, JSW Energy, JSW Steel and Nalwa Sons (Nalwa Sons is again a holding company trading almost 70 per cent discount to its net asset value), are largely long-term in nature.
Notably, in some cases the value of the unquoted investments is equally important. Like in the case of Bajaj Holdings, its market capitalisation is just 43 per cent of the quoted value of investments held by the company. However, if the potential value of unquoted investments like its stake in the Bombay Stock Exchange, National Commodity Exchange and Credit Analysis & Research (CARE) is included, the value is much more as most of them are shown at the book value.
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| GOING AT A DISCOUNT | ||||||
| In Rs crore | Current value of investments (A) | Residual value of equity (B) | Total value (A+B) | Market cap | Total value (A+B)% of mkt-cap | Investments as % of mkt-cap |
| Amtek Auto | 1,226 | 6,765 | 7,991 | 3,256 | 245 | 38 |
| Bajaj Holdings | 21,067 | 381 | 21,448 | 9,027 | 238 | 233 |
| EID Parry | 5,203 | 2,790 | 7,993 | 3,328 | 240 | 156 |
| Electrosteel Castings | 485 | 327 | 812 | 673 | 121 | 72 |
| Gammon India | 745 | 2,199 | 2,944 | 606 | 486 | 123 |
| Grasim Inds | 28,185 | 10,992 | 39,177 | 24,750 | 158 | 114 |
| JP Associates | 11,982 | 10,576 | 22,558 | 16,916 | 133 | 71 |
| JSW Holdings | 1,473 | 105 | 1,578 | 866 | 182 | 170 |
| Kesoram Indus | 276 | 1,234 | 1,510 | 545 | 277 | 51 |
| Tata InvCorpn | 2,328 | 349 | 2,676 | 2,432 | 110 | 96 |
| Zuari Indus | 495 | 1,295 | 1,790 | 1,432 | 125 | 35 |
| Residual value of equity is total assets minus cost of investments minus debt. The list is based on BSE 200 companies wherein investments as a percentage of market capitalisation is more than 30% Data source: CapitaLine Plus | ||||||
Investments, not core business
There are some other companies, which hold significant investments, but also have other business activities. Companies like Kesoram Industries, Amtek Auto and Gammon India, are trading at a significant discount to the value of their assets and investments. In cases where their investment is not a core activity, the worth of the company is arrived at by adding the value of equity to current value of investments and deducting debt on the books.
On the same parameter, Kesoram, a BK Birla group company, is trading at 64 per cent discount to its total value. The market is valuing its 7.3 million tonne cement capacity, 75 Mw captive power plant and 12 lakh tyres installed capacity at just about Rs 270 crore. However, in many such cases, the discount also reflects the current shape of their business and its prospects. For instance, in the case of Kesoram, it has high debt and a loss-making tyre business, which employs 70 per cent of its capital. So, investors need to be careful while considering investment in such companies.
Gammon India is another instance. The value of its investments is almost 80 per cent of its market capitalisation. While this indicates that there is value in the stock (even after adjusting for debt), there are some issues on the business front as well. The company has suffered due to lack of new orders, shrinking order book and high debt in the books. Also, past incidents like the mishap at Delhi Metro project, collapse of a bridge at Kota in Rajasthan and collapse of a flyover at Hyderabad had led to a de-rating of the stock. However, that’s history. The company, meanwhile, is taking measures to bring down its leverage by realising its dues from debtors, selling stake (in non-core areas) and divesting from the real estate business. Will this solve the problems?
Any concrete moves to lower leverage or a turnaround in fortunes in the infra space should help and provide a trigger to the stock.
For investors with relatively lesser risk appetite, they could look at companies like EID Parry and Grasim. Though they are quoting at a lesser discount, they but are relatively in a better shape. For instance, EID Parry, a Murugappa Group company, operates in sugar and other related activities. It trades at a good discount at current share price, and most analysts tracking the firm have a buy rating on the stock. Its value of investments is Rs 5,200 crore and market capitalisation is just Rs 3,300 crore. Even on a PE basis, the stock is trading at six times its FY13 estimated earnings.