The objective of the strategy is to seek to unlock value by investing in listed holding companies across a wide array of industries. Holding companies in the strategy ’s universe are defined as those entities which hold stakes in other listed entities, and trade at a significant discount to the NAV of the underlying assets. The Holdco strategy identifies strong underlying businesses and looks for significant valuation discounts that are likely to recover as promoters feel the heat of change in the regulatory landscape; or as underlying businesses exhibit significant growth.
The strategy would focus on holding companies which are sub-scale and run as group holding companies rather than strategic investment companies. These companies which are typically run by, for and of the promoter are the most likely ones to feel the heat of change in regulatory landscape. The Companies Act, 2013 have enabled certain shareholder rights and are likely to bring sweeping changes in how companies approach “Related Party Transactions”. The renewed thrust of MCA and SEBI in ensuring higher level of corporate governance could prompt promoters to consider delisting their holding companies, leading to value unlocking for public shareholders. There is a clear opportunity to plan well and buy assets with a fair value of Rs.100 at Rs.50 or lower. The intent is to engage with and nudge the promoters to unlock value through demerger, delisting, corporate restructuring, etc.
Secondly, when the Indian economy liberalised in the 90s, new opportunities such as insurance, asset management, credit cards, investment banking and brokerage were open to the private sector. Of the variety of firms that entered these areas, the greatest successes in terms of market share and profitability were ventures sponsored by leading financial institutions of the country. Over two decades, these new ventures have matured and many of them are being listed. The erstwhile promoters and sponsoring banks stand to gain disproportionately as the growth potential of their subsidiaries is captured in growing market capitalisation. Given the lower risk profile of sectors such as insurance and asset management and their tremendous growth potential, we have an opportunity to invest in the parent’s equity and realise both gains in earnings from the consolidated entity as well as potential gain in valuation.
Our universe will comprise firms of two types:
Illiquidity is the biggest risk beckoning the investor considering exposure to Holding Companies. Most of value unlocking in holding companies will have “pressure cooker” effect in price whereby a single event can overnight make the valuation convergence happen whether it is 100% or more. Till then the stock may remain sideways or even drop in a rising market. Price volatility is also an unavoidable phenomenon where the discount between fair value and market value converge in a bull market and widen in a bear market in addition to volatility in fair value itself. Sophisticated investors believe risk is a chance for absolute loss of capital and since each stock is bought at steep discount to current price of a growing asset, chances are less for a capital loss. On the other hand, if we define risk as measured by standard deviation of the stock, then such stocks would fall under the high risk category.
With respect to group entities in the financial services sector, risk pertains to the fortunes of underlying companies with varied risk profiles being tied together. Any mishap, especially on the credit side, in any of the businesses is likely to cast a shadow on the other companies.
The portfolio is likely to have around 15-20 stocks in the PMS platform. The investor's assets will always remain in the investor's name with a SEBI registered custodian. While tracking and monitoring of investments will be active, there’s likely to be low turnover in the strategy.