There are a number of companies listed on the Indian exchanges that conduct a large chunk of their businesses through their subsidiary companies. They report their standalone and consolidated results separately. While going through many of them I found that some of them wereseverely undervalued if one takes into account their consolidated results. Also they have been growing handsomely on consolidated basis but not so well on standalone basis.
Some examples that come to my mind include- Gateway Distriparks, Allcargo Logistics, United Phosphorous , Havells and many more.
Now the questions that come to my mind include-
1). What exactly is the purpose of such an exercise? If it is better governance of related businesses, then it is understandable. But then the market generally prices such companies on the basis of their standalone results only.
2). Also, the dividends are declared wrt their Standalone EPS and not Consolidated EPS, which is again not a very happy situation to be in for minority shareholders.
3). Can the intentions of the promoters be doubted in such cases as they derived the profits out of the standalone entity in the first place to set up profitable subsidiaries and now the subsidiaries are not giving any thing back to minority shareholders?
4). Can we say that these are value traps or there is anything more to it?
I would request fellow valuepickrs to throw some light on these issues because if clarified properly, can throw up a number of very interesting investment opportunities.
Even if thesubsidiariesare profitable all shareholders will profit form it.
Whileanalyzingthe companies it is better to look at the consolidatedresults ( may be you can check whichsubsidiaryis performing EX: Jaguar Landrover for Tata motors).
If you feel company undervalued on a consolidated basis , then go for it.
But beware of companies like Fortis healthcare they have the history of keeping profitable companies tothem self and include loss making companiesin the listed entity.
Having subsidiaries and unethical promoters are two completely unrelated topics. A company typically gets a subsidiary through acquisition or by expanding to new countries, where the rules may prohibit a foreign entity to own 100% of stocks in a local company. Think about Nestle India and HUL, both of which have most ethical managements, but these are subsidiaries of parent companies.
Thanks for the reply…it really mattered to me as never looked at the legal angle in having to set up subsidiary. This must be specially true in case of all big and mid sized companies havingsizableoverseas ops.
But what about companies conducting their various Indian Operations under different subsidiaries. Is there anything else to it???
Again in case of local subsidiary, there could be multiple reasons. The most common one is following:
The company wants to start the operation on its own, but a key component(land, raw material, technology, patent, delearship network, political contact) is owned by some other entity/individual and he wants a share in the business. The company will typically accommodate such entities/individuals.
But in some cases, companies have a subsidiary, where a certain percentage of shares are owned by owners themselves and remaining are owned by the company owned by them. These are typical cases of fraud and one should avoid such situations.
We have tried addressing this problem by building a algorithm which checks the relevance of standalone vs consolidated results and displaying the right one.
At www.screener.in, if consolidated results are more relevant then you will see consolidated results by default on opening a co and vice-versa
Yes, the automation we have done at screener should help in displaying the relevant nos. However, in one of cases, manual intervention might be needed.
