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These 3 holding companies trading at large discounts are good bets

Holding companies often trade at a discount to their intrinsic values. This discount has increased significantly for some companies in recent weeks, making them attractive bets.

, ET Bureau|
Mar 11, 2019, 06.30 AM IST
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Most Indian holding companies are investment companies of their promoters.
The market tends to downsize the valuations of large conglomerates, as it is difficult to analyse them. Parent companies, therefore, often quote at a discount to their intrinsic values. “It is easy to analyse standalone companies. A number of businesses makes analysis quite difficult. Since the risk is higher, the market gives only lower valuation,” says Shailendra Kumar, CIO, Narnolia Financial Advisors.

Also, with holding companies, investors are forced to buy several businesses, all of which may not be their favourite, and this also leads to lower valuations. Another reason is that most Indian holding companies are investment companies of their promoters, and their actions may often be in the interest of the promoters and not of the minority shareholders. Finally, the valuation differentials across countries also contribute to the parent company discount. For instance, Maruti Suzuki is now quoting at a premium to its Japanese parent, Suzuki Motor Corp.

Sound investment bets
As discounts of some holding companies have recently increased, they have become quite promising. “About 30%-40% holding company discounts are common in India and, therefore, go with companies with larger discounts,” says Daljeet S. Kohli, Fund Manager, Valentis Advisors.

But you need to be careful of intergroup transfers that may favour promoters and not the retail investors. For instance, the recent decision of Cairn India Holding—a subsidiary of Vedanta—to pay Rs 1,430 crore to Volcan Investments—the parent company of Vedanta—to invest in Anglo American, held by Volcan, has raised concerns. You should also avoid parent companies that are quoting at a discount because of poor corporate governance. Also, you need to stay invested for the long term, as it can take time before a parent company decides to unlock the value in the subsidiary companies.

After taking all of the above into consideration, the following holding companies seem ripe for investment*.

1. Bajaj Holdings: Robust growth of subsidiaries
Total value of holdings: Rs 68,215 crore
Market-cap of Bajaj Holdings: Rs 35,270 crore
Discount: 48%
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Bajaj Holdings has several fast growing companies under its umbrella. It has direct investment in Bajaj Auto, and holdings in Bajaj Finance, Bajaj Allianz General Insurance and Bajaj Allianz Life Insurance through Bajaj Finserv. “Consumer durables finance penetration is only around 20% and Bajaj Finance has around 70% market share. Despite strong growth in past five years, Bajaj Finance’s loan book should grow at 32% CAGR over 2018-19 to 2020-21,” says a recent Jefferies India report. It’s unlisted subsidiaries, Bajaj Allianz General Insurance and Bajaj Allianz Life Insurance, are also doing well. Given the performance of all its subsidiaries, the 48% discount to net asset value (NAV) is not justified.

2. Godrej Industries: Holds promising unlisted firms
Total value of holdings: Rs 30,644 crore
Market-cap of Godrej Inds: Rs 16,868 crore
Discount: 45%
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After the listing of Godrej Agrovet, Godrej Industries has almost became a holding company because it generates major value from its listed subsidiaries and associate companies. However, the business of the parent company, which mostly deals in chemicals now, is not negligible—it generated revenue and net profit of Rs 573 crore and Rs 50 crore, respectively, during the third quarter of 2018-19. As it has several unlisted subsidiaries with 100% holdings, the actual discount is much more than the 45% computed on the basis of its listed subsidiaries.

3. Grasim Holdings: Parent sees sharp growth
Total value of holdings: Rs 84,823 crore
Market-cap of Godrej Inds: Rs 53,131 crore
Discount: 37%
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Since the domestic demand for VSF—a biodegradable fibre— continues to be robust, the standalone business of Grasim is also doing well. While its revenue for the third quarter of 2018-19 grew 21% year-on-year (y-o-y), to Rs 5,293 crore, its net profit grew 28%, y-o-y, to Rs 608 crore. The outlook for its standalone business remains robust. While its discount based on listed subsidiaries is placed only at 37%, this does not consider its booming standalone business. Even at a PE of eight, based on its last year’s standalone net profit, this division should be valued at Rs 14,000 crore, which will take the discount to 46%. While most of its subsidiaries are also doing well, there is concern about its loss-making telecom subsidiary—Idea. However, Grasim’s Idea holding came down to 11.55%, after the telco’s recent merger with Vodafone.


*Market-cap as on 5 Mar 2019. Holdings as on 31 Dec 2018. Compiled By ETIG Database

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