Saturday, April 01, 2006

Holding companies, interesting investment plays

Investment in holding companies makes for an interesting play. It offers some great arbitrage opportunities. Here is how - holding companies are usually pure investment vehicles that hold shares in either the group's flagship company, or investments in a host of other listed/non-listed group companies. An article in Outlook money explains this well. Here's a excerpt from the article:

A holding company can be a pure shell company with investments in one asset block or in many. For instance, Vardhman Spinning, the holding company of Mahavir Spinning, has no manufacturing business of its own; it owns 10.2 million shares in Mahavir Spinning. Then there’s UB Holdings, which transferred its beer business to a subsidiary, United Breweries, and now holds 48 per cent equity stake in McDowell’s, and 100 per cent in Kingfisher Airlines and UB City. A similar story is seen in KojamFinvest, the holding company for the Nicholas Piramal group.

In India, such holding companies are valueed at deep discount to their real market value. The discount is as high as 65-70 per cent. But, if one were to monitor the twins (ie. the market value of the holding company vis-a-vis the market value of its holdings) there can be a case for an arbitrage play.

The arbitrage should, however, be done with the assumption that the "upper limit" for the holding company is around 30-35 per cent of the mkt value of the underlying holdings. Thus, any deviation from this on the lower side can be used as an opportunity. I've listed down example of two such cases in which i've been trading in the last one year, with reasonably good success.

Case 1 - Morarka Finance.

The company is a holding company of Dwarikesh Sugar Industries Ltd (DSIL). It holds 2,348,818 shares or a 15.1 per cent stake in DSIL. At current prices (Rs.257 as on 31-Mar-06), DSIL is valued at Rs.400 crore. Value of Morarka Finance' holding in DSIL thus comes to around Rs.60 crore (15% of Rs.400 crore). Given that holding companies in India are valued at 30-35 per cent of their true market value, Morarka Finance should be valued at Rs.18-20 crore. But, at Rs.30.5 per share, Morarka Finance's mcap is only Rs.13.5 crore. Morarka Finance shares therefore seem to be undervalued to the extent of 33-48 per cent.

Disclosure: I've an open position in Morarka Finance (bought day before yesterday @ Rs.30.5). I intend to sell it once the arbitrage is no longer available. ie, when, - 0.3 * Value of Morarka Finance' holding = Mcap of Morarka Finance.

Case 2: SRF Polymers.

SRF Polymers is a holding company of SRF Ltd. The company holds 36.5% stake in SRF directly and through its 100% subsidiary - SRF Polymer Investments Pvt. Ltd. At Rs.331 per share, market capitalisation of SRF Ltd. comes to Rs.2,142 crore. Value of SRF Polymers holding thus comes to around Rs.781 crore. Thus, the approximate the market value of SRF Polymers should be in the range of Rs.234-274 crore (30-35% of true market value). But, at current prices (Rs.214), SRF polymer shares are quoting at a mcap of Rs.140 crore. Clearly, there seems to be an upside of 67-92 per cent from current levels.

Disclosure: I do not hold any shares in SRF Polymers. I tried buying them in the last two trading sessions, but unfortunately the damn thing was stuck at the 5% upper circuit. Hope to get in on Monday.

There are many such other companies listed on the bourses. However, I've restricted myself to these two. Some of the other companies include - Zuari Industries, Vindhya Telelinks, UB Holdings, Nahar group companies, Winsome Textiles Industries, Shree Rajasthan Syntex and Shree Rajasthan Texchem, etc. Investors are advised to do a thorough study before taking any investment calls made out on this or for that matter any other blog.
Any contrary views on this style of investing ?

Happy investing.


Chandravadan J Sheth said...

What is the reason to restrict your interest in only 2 scrips ?
The companies you listed are holding companies or parent companies ? what are the names of the counter parts of these companies ?

Thanks a lot for giving a new idea .

Ravi Purohit said...

Chandu: I usually do not trade in stocks. But, investing in holding companies that trade at such large discounts to their fair market value offers a good margin of safety. And sharp fluctuations in the value of holding companies vis-a-vis its fair value offers good arbitrage opportunities, which is what I try to cash in on.

The list that I've put are all holding companies. Some of these have businesses of their own as well while many are pure investment vehicles.

Prasanth said...

Have you checked out Tata Investment Corporation? It can also be classified as a "holding" company.



Ravi Purohit said...

Prasanth: Yes I've looked at Tata Investment Corp. But, that was a while back. Havent really studied or computed its real market value recently.

Best Regards,

Anonymous said...

Dear Ravi,
Have you followed Consolidated Finvest and Holdings, the holding company of BC Jindal group? What is your take on that?


Chandravadan J Sheth said...

I referred the SRF LTD Stock on BSE. There ,looking to the share holding pattern, I could not locate 36.50% holding by any corporate. How to find that percentage ?

Please enlighten and oblige.

Thanks in advance.


Ravi Purohit said...

Chandravadan: Please follow the link-

Anonymous said...

I liked your way of thinking at this risky time of investing.. I want to ask a dumb question and i.e what is arbitrage?
I plan to buy Morarka Finance which is quoting at 30.6 - nearly the smae price you bought



Ravi Purohit said...

Vikas: The word arbitrage here meant taking positions when stark differences in valuations are seen. By investing in Morarka Finance one is really speaking investing in Dwarikesh Sugar (since Morarka on its own does not have any business).

But, investing in morarka gives me a nice margin of safety as it is already substantially lower than its real book value.

Ofcourse, in daily stock market life the word arbitrage would mean -

"A kind of hedged investment meant to capture slight differences in price; when there is a difference in the price of something on two different markets the arbitrageur simultaneously buys at the lower price and sells at the higher price".


Anonymous said...

Dear Ravi,
Thanks for everything.
Can you comment on advantage to us holders of Mor Fin of following news item in Power your trade:
Dwarikesh Sugar to sell accumulated carbon credits in '07.

Ravi Purohit said...

Sunil: What is the full news ?

Anonymous said...

Dear Ravi,
Regarding that news item in Power Your Trade, I could not get any more info.

Ravi Purohit said...

Sunil: From what I've heard, Dwarikesh Sugar's new plant which got commissioned very recently will definitely receive carbon credits. But, I think the quantum is likely to be small. I think the main driver of this co's performance would be volume growth in sugar and higher ethanol sales. A informed mkt participant tells me that DSIL's share price can go upto Rs.350 in another year or so. That of course, augurs well for Morarka Finance. I think it can post handsome returns, if held patiently.