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Wednesday, June 22, 2011

Bajaj Holdings-why it is still a BUY despite the holding company discount

When the markets are down and investors rush to safety, a common theme that becomes popular is the 'holding company' one. Promoters often use a listed shell company to hold their controlling stake in listed operating subsidiaries. For example, Tata Investments, Bajaj Holdings, M&M etc. Quack 'stock analysts' often do a simplistic calculation that the net book value>>current market price, so but the stock. they often forget that
  1. These stocks often do not pay any dividend
  2. The value is unlocked only if the company divests its stake, which is unlikely. 
  3. Promoters control over 50%(and often over 76%), so minority shareholder rights can be trampled upon with impunity with corporate actions like demergers. 
I have blogged on some of these risks earlier, here. Despite all this, Bajaj Holdings(INR 740, Mcap 8261 crores http://www.bseindia.com/bseplus/StockReach/AdvanceStockReach.aspx?scripcode=500490) seems attractive because
  1. Mkt value of group company investments around 17,000 crores. Even applying a 70% valuation discount for control, that comes to INR 5100 crores. Add nearly 5000 crores of other investments, and the intrinsic value comes to around INR 10,000 crores. Company is debt free, with little intercompany loans, so this figure(Rs 10,000Crores) can be the  conservative 'fair value'. 
  2. Promoter holding(incl associates) is hardly 50%, so the possibility of minority shareholder abuse is lower. If the company decides to sell out/divest, it needs the minority shareholders on board for most corporate actions. This, coupled with the generally good corporate governance, reduces the possibility of tunneling, as may happen in companies with promoter holdings over 76%.
  3. As Sharekhan mentions in its research report(http://www.moneyguruindia.com/article.php?cid=1358&id=4), the present dividend yield is good. But this cannot be relied upon for long. So I'm not factoring dividends, since this is quite discretionary.

Conclusion:-Both Bajaj Finserv and Bajaj Auto are doing well in their industries. The triggers for further growth in the share price would be
  1. Increase in professional management, specially at the operating subsidiary level
  2. General rerating of holding companies, thus reducing the valuation discount. 
  3. Operating subs doing well, therefore boosting the holding Co shareprice proportionately. 
Holding this as a long term bet, seems a good option. Compared to the other holding Cos out there(http://articles.economictimes.indiatimes.com/2010-04-26/news/27616174_1_holding-cos-investment-bets-tata-investment-corporation), Bajaj's governance and valuations are probably the best.

1 comment:

Lavanya Sethi said...

I have taken personal loan from Bajaj finance for Rs 714000/- . They cheated me by deducting Rs 14000/- in the name of insurance at the time of disbursal. When I tried enqiuiring about this there is no response from Bajaj Finance . I have written them the repeated mails to their customer care and the customer representatives from the Bajaj finance . Looks like it is falling in deaf ears.
My idea of writing this complaint to get my money back what they deducted in the name of insurance , i.e, Rs 14000/-. I have even filed a complaint against them on their site as well as at Consumer Court site but so far no action has been taken on this case.