Had the pleasure of listening to Basant Sir on CNBC TV-18...
TheEquityDesk.com's views on holding cos
Some of the holding companies have been buzzing off-late. In an interview with CNBC-TV18, Basant Maheshwari, investor and founder, TheEquityDesk.com said, he would suggest buying those holding companies whose subsidiaries are not listed. “Buy those companies where the earnings get consolidated, the subsidiary pays dividend and holding company has a majority holding,” he added.
A holding company is a company that owns other companies' outstanding stock. It usually refers to a company which does not produce goods or services itself, its purpose is to own shares of other companies.
Below is the transcript of his interview with Udayan Mukherjee and Mitali Mukherjee of CNBC-TV18. Also watch the accompanying videos.
Q: What is your top undervalued name in this holding company list? Most of them trade with a big discount to their intrinsic value, but which one is top of your list?
A: There is an unwritten rule in investing, ‘investors make money in a cheap stock only when the cheap stock becomes expensive.’ Most of these holding companies go up for a year or two quarters and then they fizzle out. I will give a list of examples both from India as well as internationally.
Williamson Magor and Company has gone up a bit now. It holds stake in Kilburn Engineering . But if you had bought the stock in 2006 attempting to be a bit smart like all of us are in the market, it was available at Rs 45. For the last five years, it has given us a compound annual growth rate (CAGR) of 9.4%, less than a bond market CAGR, Let us take example of Maharashtra Scooters. It trades at discount of 70%, it holds Bajaj Auto . Had we bought it in 1994, it was available at almost at the same price it is available right now, so you get a 2% CAGR there.
You have got Tata Investments , a listed value at Rs 900, post tax value of investment at Rs 790, available 40% down, you can buy that. You can buy Bajaj Holding with market value of investments at Rs 18,000 crore, and a market cap of Rs 8,500 crore. But the problem with these companies is that the discount tends to remain.
My argument is that if you are bullish on Bajaj Auto, it is better to buy Bajaj Auto rather than buy Maharashtra Scooters. If you are bullish on Kilburn Engineering or McLeod Russell then go and buy those stocks, don’t buy Williamson Magor. You will make money in one-two-three-four months. But if you hold it for a long period of time, it won’t make money.
There are some international examples as well. There are several examples right from Russia to South America where the holding company stays at a discount. That discount doesn’t tend to go away. So, if you are playing for the discount, it’s incorrect because the discount will remain there. For example, AFK systems holds a stake in Russian Mobile Operator MTS and few other operating businesses as well. That is also trading at a discount 15-20%.
There is one Nortel Inversora listed in NYSE, the ticker name is NTL, that is also trading at a 50% discount, even though it consolidates earnings from its subsidiaries. Carso Global Telecom holds Telmex. Telmex pays huge dividends, but Carso Global still trades at a discount of 5%.
The key in this is to buy those companies where the earnings get consolidated. Secondly, the subsidiary pays dividend and thirdly they have a majority holding. Majority in the sense you hold more than 51% either in terms of shareholding or either in terms of voting rights. But if you want to buy minority investments holding companies, normally in a bull market the discount will narrow and in the bear market the discounts will widen, but over a period of 5-10-15 years you won’t make a lot of money.
There is one example which has done very well. Godrej Industries , it has fantastic company called Godrej Properties . For four-five years, it did very well between 2003 and 2007 because investors who wanted to buy Godrej Properties couldn’t buy Godrej Properties. The only option was to buy Godrej Industries. But now if Godrej Properties is listed and if I am bullish on Godrej Properties, I will go and buy Godrej Properties. Why should I go and buy Godrej Industries?
Vedanta has got several jewels in its crown. It has got copper mines in Zambia, which are not listed. So, if I want to play on those names, I will have to go and buy Vedanta.
So, my suggestion would be to buy those holding companies whose subsidiaries are not listed. But, in all-all game it’s a very complex matter.
Q: So that is a line you are drawing between a pure holding company and a company with embedded value, right? Do you think that is the story to track?
A: That is absolutely correct. Those embedded values always remain valuable. For example, SEL Limited , market-cap is Rs 100 crore, value of investment Rs 300 crore. It has investment in Zuari Agro , Chambal Fertiliser . The stock was at Rs 30 ten years back, trades at Rs 90. In ten years, you have tripled your money, but the Sensex has gone up six times.
I will give another thought on this. There are several companies who are holding companies and do very well. Nestle; the parent of Indian Nestle , Unilever is also a holding company. But it consolidates accounts, it’s got operating assets of its own and it has got other businesses as well. One thing to understand here is that a holding company, which receives dividend payoff from its subsidiary, normally does not get into a steep discount mode. That is because if the dividend yield of the subsidiary is 2% and holding company goes into a 75% discount, then the yield of the holding company would 8% that is four times of two, so that doesn’t happen. So, the only case where the holding company discount would be narrow is when it consolidates accounts from its subsidiary and it receives dividend from its subsidiary. The dividend will help to keep the dividend yield of the holding company in check, if it goes too far below a certain value.
But, my argument is if you are bullish on the holding company, you have to be bullish on the underlying businesses and it is better to buy the underlying businesses. Betting blindly that the discount will narrow up and the discount will widen out, over a one-two quarter can make money, if I have some insider news that the company is going to restructure and things are going to happen. But over a long period of time, it doesn’t make a lot of money.
Another example is suppose theoretically Bajaj Holding tomorrow decides that we have had enough of it, let us sell all our shares at Rs 18,000 crore market value, our market-cap is 8,500 crore. That discount is there. But if you sell all those shares at Rs 18,500 crore market value, you will have to bear capital gains tax, and you have to pay some tax and distribution of income. So that 20-30% discount should remain. So, I think if it gets closer to 20% discount then it’s fairly valued. When we look at the market value, what we do is number of shares held 'X', multiplied by the price of each share 'Y', we get amount of investment 'Z', now the market price is 'A'. So, if the market price 'A' is less than 'Z' then you go and buy, no it doesn’t happen because 'Z' is the market value, you have to pay for tax theoretically assuming that investments are being sold out.
Q: Do you think there is some appeal for stories like Williamson Magor?
A: It is at a 75% discount, so obviously that discount can come to 60% and you will make 30-40% there but. If you are a long-term investor, I wouldn’t suggest buying Willamson Magor because the discounts remain. That is what my argument is. You can buy it, you can keep it for two-four months have a trading punt, assume for the market frenzy to takeover, assume for some euphoria and then say its 77%, and it cannot go to 100% obviously.
What is the price earning ratio of Willamson Magor? Has anyone looked at that? It is normal. So, you cannot value a company only on the business of NAV. It has got some real estate projects here and there, it’s a Kolkata based company. But I am not too much enthused by these things.
If you want to buy a holding structure then buy a Cadila Healthcare where it has got a fast moving consumer subsidiary called Zydus Wellness . But Williamson Magor, buy it at 78% deep discount, the discount goes to 65% to 60%, it narrows down. I will give an example if you had held it for five years; you have made only 9% CAGR, so that is not too much.
Investing, as Warren Buffet says, is its simple, but it is not easy. I am not saying that Williamson Magor cannot go up, it can go up a few percentage points here and there. But if you hold it for too long, it is going to do only as good as the underlying businesses do. So, if you are bullish on the underlying businesses then you should be bullish on Williamson Magor. If you are bullish on Bajaj Auto then you can be bullish on Maharashtra Scooters.
But my point is it is better to go and buy the underlying subsidiaries rather than try and be a bit over smart like all of us try to be in the market and buy the holding company.
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Edited by commnman - 18/Jul/2011 at 3:10pm