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 ?