Holding companies Can Be Good Long Term Investments
In writing this post, I am assuming that readers understand what holding companies mean. If not, then you may read a simple primer on holding companies (link to another blog). I do not have any particular bias against or for holding companies. As I have said on many in past, investing should be based on your objectives. These objectives should take into consideration your risk profile and time horizon. This blog is about long term sustainable wealth creation. Does holding companies fit into it? How?
I try to keep things simple and focused. Style and panacea does not give you sustainable returns. Your sustainable returns comes from substance behind those stocks. All holding companies are not created equal, and hence all cannot be grouped together as good or bad. As an individual investor, you need to separate holding companies that have substance and fits your portfolio objectives.
- At one end of the spectrum, there is a school of thought that holding companies do not have any business of their own (or operating business). They do not make money themselves. If they do not make money, then how will their value grow? They have to depend upon their subsidiaries/investments to give returns. If one values such holding companies based on dividends alone, then they will appear overvalued! Or If they are valued based on market price or intrinsic value of subsidiaries, then holding companies are likely to seem depressed.
- At other end of the spectrum, there is Berkshire Hathaway, which is also a holding company. Can we say it is, or was, a bad investment?
For my long term buy and hold portfolio, it is imperative that business has focused vision, potential growth, and sustainable dividends. There are holding companies that fit into them. Following are holding companies that I read about and follow.
Nava Bharat Ventures Limited (NBVENTURE): This company has slowly transitioning into holding type of company. Originally, it was manufacturer of ferro silicon and was one of the largest Indian exporter of ferro alloys. It also has sugar production facilities and sugar by-product (rectified spirit and extra neutral alcohol). Over time, this company has started venturing out in power generation and infrastructure projects (e.g. special economic zones and real estate development). It also started a fully owned subsidiary for trading activities (mineral resources and ferro alloys).
- Operating Cash flow (positive, increasing, but less than net profit)
- Debt (high, higher than cash flow, almost same has net profit)
- Dividends (yes)
- Reported Net Profit (positive)
- Margins (positive, and increasing)
- Capital usage (good, more than 30%)
- My observation is; other than debt and cash flow, it seems to have good balance sheet.
- I have been following this company for a while now. It seems to keep venturing into next hot market, first sugar, then power generation, then real estate, and now material trading. Trading is an activity that has less investment and tends to increase margins and returns.
- I like its high dividends, but I am concerned about sustainability over time. Annual reports consists more of ‘style’ and ‘growth opportunities’. It lacks substance. I have been on the border line about this company. Not bad enough to shun it, but not good enough to jump in.
Bajaj Holdings and Investment Ltd (BHIL): This company was formed after the re-organization or demerger of erstwhile Bajaj Auto Limited. BHIL on a standalone basis is like an investment company. More or less similar to Tata Investments but not exactly same. It appears that BHIL wants to focus on managing capital allocation and development of new businesses. Its investments are in Bajaj Auto Limited (31%), Bajaj Finserve Limited (36%), Maharashtra Scooters Limited (24%), Bajaj Auto Holdings Limited (100% subsidiary). It also has other investments in funds and securities. Under the umbrella of Bajaj Finserv Ltd., the group is entering into new business like insurance, wind farm, and NBFCs.
- Operating Cash flow (mixed, volatile, less than net profit)
- Debt (zero)
- Dividends (yes)
- Reported Net Profit (positive)
- Margins (positive, 90+, nothing unique, typical for holding company)
- Capital usage (mixed)
- The company shows typical characteristics of a holding company, which is zero debt, high margins, not great cash flow, etc.
- Like Hero Honda, Bajaj Auto was another company that has been on my buy list for a long time. I have been following this company right through its demerger. After demerger, I was trying to figure out the direction company is moving. How it will sustain its dividends?
- For now, new businesses seems to be part of Bajaj Finserve. I expect that over time, these businesses will grow and provide sustainable dividends for its BHIL owners. It is also likely that over time, depending upon size of businesses, they are likely to be demerged where the capital appreciation is likely to come from.
- Suffice to say, I like BHIL, the only question that remains is what price should I buy.
There are two other holding type of companies that I like and remain invested. These are:
- Tata Investment Corporation Ltd (link to my earlier analysis)
- Reliance Capital: This is not a typical holding company yet. However, the way it is expanding into various businesses in financial sector, few years from now, I expect that it will transform into a holding type of company. I expect that all the various business that Reliance Capital has (money, insurance, asset management, broking/distribution, etc) will most likely get listed on its own. That’s where the most capital appreciation likely to come from – a typical holding company creating businesses. I won’t be surprised if Reliance Capital enter banking business also.
Summary is…
These holding companies meet my objective of growing with the business. A true meaning of long term investing philosophy – growing with the business. So while I wait for management to grow their business (i.e. value increase), they are likely to continue pay me dividends.
This post is not about my position on holding companies. The post is about, I do not have bias just because it is a holding company. I have an objective based investment process. And if a holding company fits into that, I will invest and buy its shares. I do not want to create a missed opportunity just because it is a holding company. Isn’t that simple?
So which holding companies do you like and follow ?
501301, bajaj auto, bajaj finserve, bajaj holdings and investments, dividends, holding companies, Nava Bharat Ventures Limited, NBVENTURE, Reliance Capital, Tata Investment Corporation Ltd., TATAINVEST
Hi Tipguy,
Have u ever traced stock kalyani steel and kalyani investment?i think this company is stake holder in bharat forge…i am not sure…do u have any data about this?they recently had demerger…
Hello Chetan,
For now, watching and following this demerger. The new entity is called BF Investment Ltd (BFIL). It is not listed yet, but expected to happen soon. I will continue to follow, but less likely to buy any shares in near future.
Best Wishes,
I hold Andrew Yule which is sole promoter of Tide Water Oil’s 26%. Another is Balmer & Lawrie Investments. This company holds Balmer & Lawrie Ltd’s 66% stake. at cmp NAV of BLIL is 340 while CMP is 165
These two are wonderful companies to hold for a long term.
regards
Hi MIP,
Long time no see! Hope everything is going good at your end.
Balmer & Lawrie Investments (BLIL): I have read about BLIL and given it a pass. BLIL is formed purely to hold shares of BLL. By its charter, it is not supposed to transact in any other securities or any other investments. It’s sole objective seems to be holding shares of BLL until disinvestment happens in BLL. After disinvesting shares of BLL, BLIL charter is to wind its business down. It is not positioned to grow in future. Is my understanding right? Please correct me if I am wrong.
Andrew Yule: In last five years, it has had negative operating cash flow, negative profits, too high debt. Other income seems to contribute disproportionate to the total profits. It could be a turnaround story, but I am not looking for them.
And hence, they both, do not fit into my long term objective of growing with the business/company.
Best Wishes,
There is nothing to do right now in the market, so sitting idle. Just reading here & there. quick 20% profit in Andrew has made me reading books about how to make timely exit
. but i am yet to gather courage to exit Andrew. My other holding is Diana tea, which i am holding it for next couple of qtrs.
Regarding BLIL, Yes it is a SPV (special purpose vehicle) for BLL apart from that they hold nothing. One has to wait for Govt’s decision to sell BLL.
regards
Great Topic. Has been on my mind for some time now and so obviously there are few questions:
1. With reference to the point in Neeraj’s post of holding company having ‘Strategic stake Vs Financial Stake’ and treating(valuing) each of them differently simply because strategic stake may never get sold/realized. Do you factor in this difference in to your fair value calculation ? If yes, how ? (The how part of the question is because as per my knowledge there is no such breakup provided in the AR)
2. There is a school of thought which wants to treat holding company like TIC as a MF scheme (and the best one at that, because because it’s CMP is less than it’s last stated NAV).
What’s your view on that? Can an individual who wants to invest in MF just take into account the published NAV value of a holding company like TIC and buy it with the thought process that he is getting it cheaper based on CMP ?
3. If am not wrong NAV in case of companies like TIC is calculated as per the market value of the investments (except for the unlisted investments, which is calcuated as per independent valuations) it holds where as in case of Berkshire it’s calculated on the basis of book value. Is this correct ? What’s your view on the same ?
Regards
Raja
Hello Raja,
I have not ignored this comment and questions. I am just thinking how best to answer. It has too many question, so perhaps, deserves a separate post.
Best Wishes,
Hi tipguy,
i read some books about buffet,what he is telling holding time for any good stock is forever..means there is nothing call sell on fundamentally strong company….but if fundamentally strong company’s share price running forward to its fundamental then…how to justify this ?
Thanx,
Chetan sadanand Raut
Nice Post
one of my comment on this topic is awaiting moderation!
Hello Young,
Could not find it on approval list! Was it ‘text comment only’ or ‘comment with links’?
‘Text comment only’ should be automatically published. There is no moderation. Let me know if this is the case, and I will see why?
‘Comment with links’ gets spammed out automatically. TIPBlog received 5200+ spam comments in Aug. So if your ‘comment had link’, then I do not intend to search that haystack
Let me know.
Hi,
It had a link to stockinfos dot in web site…. just thought of sharing an article.. which told what is meant to be holding it long!
I’m sure you’ve received this question before but I can’t find it in any of the comments or articles, so please bear with me.
How many hours a day/week do you spend analyzing various investment opportunities? Considering you have a full time job, do you do this daily or most of it over the weekend?
Hello Anish,
Not daily! There is no hours fixed. How can that be? I do it over time. It is difficult to say if I have any fixed time frame or schedule. In short, I cannot define it on time factor. However you may read my post about “Narrowing Search Space – Looking for Needle in a Haystack”. It provides the picture.
Best Wishes,
hi
i m following two stocks M&M finance and bajaj holding..both having same PE ratio and both almost performing well..so i am not sure how to decide merit between these two stocks…any parameter you can suggest?
Thanx,
Chetan sadanand Raut
Hello Chetan,
Good question! Stay tuned!
Thanks,
You wrote about Reliance Capital, developing businesses, and listing standalone companies. Anil Ambani announced that today. How were you able to predict?
Hi Tip guy,
You mentioned that you like Bajaj Holdings and Investment Ltd (BHIL) and would buy , the only question in your mind if for how much.
I had two questions on this one
1. you already hold TATAINVEST so why another holding company, what about asset allocation and diversification?
2. Have you been able to determine the Fair value or the price you would be willing to pay for this one?
Thanks
Vik