Now that I have your attention, I want to clarify that I won't be talking about social relations using this platform. In Indian market's context, "Baap" means the "Holding company" which owns stake in their respective subsidiaries & associates. This blog is all about the significance of these holding companies from investor's point of view.
To start with the model, there are 2 kinds of holding companies-
1) Pure Holding Company- the one whose sole purpose is to invest in other companies 2) Generic Holding Company- the one which invests in other companies alongwith managing it's own standalone businesses Allow me to show you some historical data-
Surprised? You probably wouldn't have heard of these holding companies in first place while the subsidiaries are talk of the town!!
So how does this mathematics of holding co. operates? Following's an explanation-
The most important question that arises here is why are we assuming that holding co. trades at such discounts- because in practical life it does. Before analyzing the numbers let's discuss about the rationale behind the same.
A share price of any company is futuristic given the fact that it is based upon the future cash flows of that company. But that's not the case with a holding co. as they trade around their intrinsic or book values because-
1) Share of a holding co. is technically a derivative (Yes! I was surprised too) because it derives it's value from underlying subsidiaries.
Let's suppose that you create a chain of companies, thereby creating many derivative branches because of which a simple Rs.10 would be converted into Rs.100 of derivative. So in order to avoid that share of holding co. trades at heavy discounts.
2) Major stake (usually more than 50%) in these holding companies is held by promoters. It's difficult to sell a large chunk of shares, thus a big discount for bulk transaction.
3) It may happen that subsidiaries are unlisted & therefore complete financial data is not available for valuation purposes.
4) Discount for lack of control.
Holding companies have been trading at 40-80% discounts in the Indian equity market.
The key is to purchase at more discount (i.e less cost per share) & sell when the discount reduces (i.e more selling price per share).
However, these companies aren't really multibagger especially a pure holding company but are safe in comparison to the overall market risk. Personally, I believe that these companies should form 10-15% of your portfolio subject to following cautions-
1) There should be clean holding (cross holding etc doesn’t create much value).
2) Buy a holding co. only when you find its subsidiary promising, so carry out analysis for same.
3) Check how holding cos. are using the dividend income earned from subsidiaries
(because paise khrab nhi hona chahiye)
-they declare further dividend-- good
-they invest further-- very good
- they give loans & advances to related parties-- not good
4) Promoter's stake must already be high & look for further positive signs like increase in promoter's stake in holding co.
5) It will be a jackpot if the subsidiary co. gets sold because shareholders of holding co. will get full value for their holding then.
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