ValuePickr Forum

How to do Valuation of Holding companies?

This is regrad to Valuation of Holding company’s shares i have several doubt and concerns in my mnd .I am just starting a thread so that to learn more throgh colloborating leraning and with the expereince of Value contributors .

A holding company: A holding company typically does not have ongoing operations other than the retention and management of assets in anticipation of future sale or trade

How to value a holding company such as Balmer Lawrie Investments or similar?
What will be the growth prospects or such holding companies?
They are mostly being high dividend giving companies and always available at discount.
The thing which attract is as their investments were more than their market capitalisations.
I need Vp’s help from the experts Is it safe to invest in such companies

Point in favour
• They don’t have any sales eventually not paying tax . only tax they have to pay is dividend distribution tax .
• There is low cost of operation only employee cost .
• OPM is >90%
• Dividend pay-out >75 average last 10 years
• In Indian scenario the holding companies are in the range of 25 to 70% discount rate , if you compare the value of the holding shares by the company
The best part they purelly financial vehicals

A few companies
• Balmer Lawrie Investments
• Kama Holdings Limited
• Tata Investment Corp
• Bajaj Holdings and Investment
• Jindal South West Holdings
• Rane Holdings
• Pilani Investment

Risks
• Inherent risk of possessed equities passed on to the holding company

it offer better return than most of the mutual funds and index returns but i am not able to find the Missing link That How to Value a holding comapny ? I need your help :sunglasses:

Regards

Ref 1 http://www.balmerlawrie.com/files/1504261982annual_report_2016-17.pdf
2 screener.in
3 https://www.businesstoday.in/moneytoday/stocks/invest-shares-holding-companies-stock-market/story/21884.html
4 regarding valuation discounts : https://www.sagefa.com/forensic-accounting-articles/valuation-discounts-for-holding-companies

Disc; Not having any stock owned I am not an analyst and this is not any investment advice .one may find their own rational to invest in the stock mentioned in the post. This is for study purpose

There is no real way to estimate the discount.The fact is sometimes the discount is even higher,almost 90 percent discount.In 2013 some of the investment companies were trading at a market cap of 1/10 th the value of the investments.

Most of the experts however believe the discount should be in the range of 40 to 70 percent.

You seem to have missed out on Bombay Burmah Trading Co. which is the holding company of Britannia. Seems to be a better investment option compared to ones listed above.

Disclosure: Invested in BBTCL

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The ideal method is to value all the underlying businesses separately (In whichever way you want to) and simply add them up. In my opinion, there should be no ‘discount’ for trading companies. I understand that the market usually disagrees with this notion.

But think about it. If you were able to buy a controlling stake in the company, you could be an active shareholders and force the management to either pay up or liquidate completely. Coming to more realistic terms, most of us probably won’t have a reasonable enough stake to trigger such an action. But it is logically impossible that the same shareholder can, at the same time, value a company at two very different price points.

In the end, I think only two conclusions and one exception can be drawn:

  1. If you trust in the management to pay regular dividends and liquidate unused assets from time to time and if you find the holding company to be undervalued, buy it.
  2. If you have doubts regarding what the management will do with the underlying businesses / investments / assets, don’t invest in the holding company. It is not a question of whether you should make a ‘discount’ and purchase it at a lower price point. This is a question of your competency in the business and the management. You are not competent enough to judge what the business / management will do. So, don’t invest in the company. That’s it.
  3. If a holding company is trading at ridiculously cheap valuations (Ex: B&A Limited), then you can probably do a Cigar Butt kind of trade without taking on a lot of risk. The inherent crazy levels of cheapness should make up for any risk related to low dividend payment or liquidation issues.

Disc: I am invested in B&A Limited to a tiny extent of my PF.

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I believe HDFC Ltd. is also a quasi-holding company. Look at the value of its subsidiaries. These account for more the 50% of the market cap, leaving their core housing business (which is by far the best in the industry) trading at less than 2 times the book value (This is when the stock is trading close to 52 week high). This fact alone makes the core business undervalued. Even Indiabulls trades at 2.5 x P/BV. Considering the quality, HDFC is way better than Indiabulls and in my opinion should trade at least at a premium to others.

Also, with one investment you get access to a complete financial powerhouse (along with 9.9% stake in Bandhan Bank which is growing at a great pace). As we all know, there is no issue about the quality of the management with the HDFC group.

Need opinion of experienced boarders on this, @Yogesh_s @dineshssairam @vivek_mashrani @hitesh2710

I think a discount equivalent to capital gains/income tax (which ever is applicable) if holding company were to sell the holdings is justified. Nothing more than that. Any idea what tax is applicable.

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Valuation of holding companies should be done just like valuation of any other company, present value of future cash flows. In case of holdco cash flow is the dividend it pays and growth rate is the expected growth rate of that dividend.

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Yes, good catch. I suppose the Long Term Capital Gains tax rate of 10%. I honestly don’t think it will impact the value by all that much, though.

Here’s what Warren Buffett has to say about it:

When you are exploring holding companies, it is worth to look at likes of HDFC and M&M. Large core businesses plus valuable subsidiaries.

Some old articles regarding holding companies


i am sharing a good video to learn about the holding companies