Can holding companies create shareholder value?

Holding companies are generally considered boring businesses

A holding company is like a landlord who owns several properties (subsidiaries) and hires property managers (management team) to handle daily tasks like rent and maintenance. The landlord owns and oversees investments but doesn't manage the property.

What makes them boring?

Holdco discount is the difference between the market capitalization of a holding company and the sum of its investments and other net assets. The discount exists since holding companies do not have an operating business. They hold their investments, with no intentions to sell, generating revenues via dividends. Hence very few investors trade in them and so they are illiquid.

For example, the charts below will help you compare the relative trading activitry in TVS Holdings and TVS Motor Company

TVS Holding Company's trading activity

Source: Screener

TVS Motors' trading activity

Source: Screener

What’s making boring business interesting?

To solve the issue of low liquidity and better price discovery, a special call auction for select investment holding companies on 28th Oct-24 (will continue till the day the price is not discovered) will be conducted by exchanges.

This will allow these holdcos to trade without any circuit limits. This should lead to better price discovery. Post this special session, the hope is that investors will get fair prices for their holding company investments owing to price and value discovery.

With better price discovery, it may provide an exit to existing investors also and can bring new value to investors who are looking to buy these companies. Basically creating efficient market conditions for holdcos.

For example, Pilani Investments has a stake in various Birla Group companies trades at ~56.5% discount to its fair value even after applying a 30% holdco discount.

This is what the regulator is trying to correct.

Comparing holdcos' market and fair value

We have evaluated the market capitalisation of holding companies against the current value of their investments.

Let’s take a simple example. Holding Company ABC has two investments

• A 15% stake in the listed company, whose market cap is ₹10,000
• An unlisted company - where the book value of the holds investment is ₹5,000

So, effectively, the value of the holdco’s investment is = (10,000*15%) + 5,000 = ₹6,500.

To this, we add Net cash (Debt - Cash; let’s say is ₹100) to arrive at a theoretical or fair value of the investment.

As the last step, we add a 30% holding company discount to arrive at the final or intrinsic value, which is: (6,500+ 100)*(1-30%) = ₹4,620/-

This price is then compared to the holdco’s current market cap to arrive at the discount/premium.

Below is the summary of holding companies along with their discount to fair value

Source: BSE, NSE, Screener; * Market cap is as of October 24, 2024

Detailed calculation of fair value of each holdco

TVS Holdings

Holds a stake in TVS Motors trades at a 38.6% discount to its fair value.

Source: BSE, NSE, Screener; * Market cap is as of October 24, 2024

Maharashtra Scooters

Holds stake in various Bajaj group companies and trades at 42.3% discount to its fair value.

Source: BSE, NSE, Screener; * Market cap is as of October 24, 2024

Pilani Investment & Industries

Holds stakes in various Birla group companies and trades at 56.5% discount to its fair value.

Source: BSE, NSE, Screener; * Market cap is as of October 24, 2024

Nalwa Sons

Holds a stake in various Jindal group companies trades at 64.8% discount to its fair value.

Source: BSE, NSE, Screener; * Market cap is as of October 24, 2024

Kalyani Investment

Holds a stake in multiple Kalyani group companies and trades at 61.0% discount to its fair value.

Source: BSE, NSE, Screener; * Market cap is as of October 24, 2024

GFL Limited

Holds a stake in PVR Inox trades at 35.2% discount to its fair value.

Source: BSE, NSE, Screener; * Market cap is as of October 24, 2024

Below are the list of other holding companies that will also participate

Source: BSE, NSE, Screener; * Market cap is as of October 24, 2024

Note: Only holding companies mentioned in the exchange’s notice for special auction are being considered currently.

Key risks and insight for Investors

Investors need to understand that this special call auction is happening for the first time for holding companies.

While theoretically, this exercise should help price discovery, as we have shown above, holdcos are typically very illiquid. Any expectation of a sudden and persistent surge in interest in these companies, might not fructify. Even once the auction is over, it is difficult to say if the price discovery will be sustained and volumes will persist.

As such, price discovery and even more importantly, continuous price discovery could just remain a hope.

How can investors participate in a special call auction?

The special call auction will be held the same as normal market operations on 28th Oct-24 where approved holding companies will be available for trade without any circuit limits. The special call auction shall be treated as successful, if price discovery is based on orders received from at least 5 Permanent Account Number (PAN) based unique buyers and sellers i.e. at least 5 unique PAN on each side.

Conclusion

This special auction could enhance price and value discovery for holding companies, creating special situation opportunities for value investors. However, the key risk remains achieving optimal liquidity and correct price discovery.