Elcid Investment is a holding company whose share price has been at around Rs. 3 for the better part of the year. The book value is at a whopping Rs. 5.84 lacs! This stark disparity between share market valuations and book value has now caught the attention of SEBI. Often used as a vessel for promoters to derisk, holding companies usually have no day-to-day operations but simply own multiple businesses. A past critic of high valuations commanded by midcap and small caps, SEBI has shown that even dislocations caused by low valuations are not desirable. It has introduced a call auction mechanism that is expected to allow for fair price discovery of holding company stocks traded on the exchanges.
Why invest in holding companies in the first place?
It’s this discounted valuation versus the book value that pulls investors towards listed holdcos. The assets they hold include stakes in group/other companies, real estate assets, or brands which in many cases are fundamentally strong, dividend paying and growing companies. This strong underlying investment portfolio contributes to a strong book value. Further, the majority shareholders of Indian holdcos are usually promoters. Free float is usually low, which makes these stocks inherently less liquid and trading is perhaps artificially muted leading to a lack of true price discovery.
What’s in the works?
Value investing (some may say these are value traps) is not everyone’s cup of tea though. In an attempt to narrow the discount and aid price discovery, SEBI has mandated stock exchanges to conduct annual call auctions without any upper and lower circuit bands, for these holding companies starting in October 2024. The process allows investors to place a buy or sell order of the holding companies on a specific date in a certain time interval. Announced on 24th June, 2024, it led to a rally in the share prices of holdcos on the day.
| Company | Share return on 24th June, 2024 |
| Kalyani Investment | +20% |
| Dhunseri Investment | +14% |
| Kama Holdings | +9.4% |
| Pilani Investment and Industries Corporation | +20% |
| Zuari Industries | +13.5% |
This spike may have probably already narrowed the respective discounts somewhat.
Not every holdco qualifies for the call auction though. There are some conditions – a key one being that the holdco should trade at a minimum of 50% discount to the book value.
Our take
The discount may not always be unjustified. While comparisons are being made of the market price versus the book value of the portfolio of investments held by the holdco, it would hold water only if the holdco is going to sell the investment at some point. Kalyani Investments holds a 13.6% stake in Bharat Forge, a stock that has close to doubled in the last 1 year, which means the value of Kalyani’s investment has also doubled. But that doesn’t mean Kalyani Investments will simply up and sell the Rs. 10,000 crore odd investment. It’s not a tactical investment for the holdco but rather a strategic one, much unlike the investment objective of a non-promoter investor who would seek to make a buck on the rally.
Hence, valuation methodologies like asset-based models, price-to-book value etc. may not be valid.
While SEBI cannot compel the market to arrive at the “right” price for a given stock, it probably doesn’t harm anyone to attempt this new method to see if there is a better or “more right” price out there that buyers may be willing to pay. The worst that can happen is that the prices remain where they are.
Post the exercise, it will be interesting to see if:
- The market will ascribe new value to these holdcos.
- The circuits will be reset with the newly discovered market price.
These companies are largely promoter driven. The same promoters hold a stake in the underlying investments of the holdcos. Hence the probability of promoters allowing for holdco exits in other promoter-held companies is low.
Until there are such exits, valuation discounts, while perhaps a bit narrower, may still persist. However, there is no harm done by SEBI’s new move and there really is only upside to this decision.