Can investing in holding company stocks fetch bumper returns?

For Indian investors, taking exposure in holding company stocks could be a relatively new concept given that there are not many such stocks among the plethora of companies listed on Indian exchanges.

A holding company is a business structure that has been registered with the intent of controlling other group companies. Since the main purpose of a holding company is to make investments in other group entities, it usually does not produce goods or services itself.

Some examples are: JSW Holdings which is an non-banking financial company (NBFC) that serves as the investment arm for the JSW Group; Bajaj Holdings & Investment Ltd is a holding company of the well-known Bajaj Group; and Tata Group's Tata Investment Corporation Ltd (TICL) is also an NBFC.

The institutional research arm of domestic brokerage house HDFC Securities Ltd has analysed 18 holding companies, their historical discounts movements, and performance of underlying investment portfolios over the years.

The findings show that 14 of these stocks outperformed Nifty in two time frames: (a) FY16-H1FY22 (Nifty returns: 16% CAGR) and (b) FY11-H1FY22 (Nifty returns: 11%). In the past 10 years, nine stocks have delivered more than 20% CAGR. CAGR is short for compounded annual growth rate.

Apart from impressive returns, what makes these stocks attractive is their valuation. Stocks of holding companies typically trade at a discount to the fair value of the assets they hold, which may include investment stakes in group/other companies, real estate assets, or brands, said the HDFC Securities report. "While Indian holdco stocks are majorly owned by promoters and typically trade at a discount of 30-90%, their global counterparts trade at a lower discount level of 10-25%," added the report dated 2 December.

A word of caution though. Analysts note that there are two prerequisites for picking holding company stocks. First is that the prevailing holding company discount should be historically high. Second, the underlying investment portfolio should have stocks that are fundamentally stable and expected to grow.

"Through our analysis of holding companies, we have found empirical evidence that in the absence of either of the above two conditions, the returns on holdco stocks would be disappointing," said the report.

HDFC Securities is bullish on nine holding company stocks which include Bajaj Holdings, Summit Securities, Kama Holdings, Maharashtra Scooters, and Tata Investment Corp.