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Driving Value

Bajaj Holdings has been a power-hub of gainful activity, even though holding companies are not investors’ favourites

This article was first published in the November, 2009 issue of Wealth Insight magazine and takes a look at what is keeping Bajaj Holdings & Investment Limited at the forefront.

The holding company Bajaj Holdings & Investment Limited (BHIL) was created out of the demerger of Bajaj Auto Limited, which manufactures and distributes two-wheelers.

BHIL currently, holds various amounts of stake in group companies like Bajaj Auto, Bajaj Finserv and Maharashtra Scooters. The company is categorised as a Non-Banking Financial Institution (NBFC) and functions primarily in the investment space.

In 2008 Bajaj Auto was de-merged, whereby its manufacturing undertaking has been transferred to the new Bajaj Auto Limited (BAL) and its strategic business undertaking, consisting of wind-farm business and financial services business, has been vested with Bajaj Finserv Limited (BFS). Rest of the business and properties, assets, investments and liabilities of erstwhile Bajaj Auto Ltd are now part of BHIL.

The argument at the time of the demerger was to tap the growth opportunities in the auto, wind-energy, insurance and finance sectors in a well-regulated manner. This will also help in ensuring greater accountability and make it easier to establish the relative valuations of the various businesses.

BHIL’s earnings come from dividends issued from its associate and subsidiary companies. Its other source of income is interest derived on loans, bonds, securities and debentures.

The company’s promoter-list is very long, with 49 individuals and 28 companies/institutions holding 31.36 per cent. Jamnalal Sons have the highest holding among the promoters at 13.54 per cent.

Among the non-promoters, there are 309 individuals who have more than Rs 1 lakh invested in the company, cornering 15.48 per cent. Meanwhile, among institutions, the insurance companies and foreign institutional investors (FIIs) have the largest holding in the company.

Investment Rationale
Top-Line & Profit Growth
BHIL’s top-line witnessed almost a three-fold growth, from Rs 72.2 crore in Q2FY09 to Rs 210.3 crore in Q2FY10. The profits the company earned through sales of investments — worth Rs 180 crore — during this period was the primary reason behind the jump in the top-line. Net profit also improved three times to Rs 325.9 crore in the quarter from Rs 106.3 crore in Q2FY09 on account of a 186.1 per cent increase in the share of profits on investment in associates, which added up to Rs 125 crore.

Strong Investments
The market value of BHIL’s investments in September, 2009 (Rs 13,109 crore) were almost double of what they were in March, 2009. Furthermore, the company has also booked some gains on its equity investments. There was a decline, from 41 per cent to 10 per cent in the costs of its other equity investments during the recent market upsurge.

High Cash & Liquid Investment
The company has Rs 5,077 crore worth of cash and liquid investments on its balance sheet. Having such high cash and liquid investment will provide it opportunities to invest in businesses that have greater potential.

Risk & Concerns
Liquidity of Investments
A sizable portion of the investments includes equity investments and investments related to the capital markets, which are volatile by nature. Thus, the valuations of the company can get affected if the equity market crashes.

Demerits of a Holding Company
Holding companies are not sentiment lifters. Usually, holding companies get a valuation discount as the market believes that these will not be sold and hence, there is a possibility that it would act as a drag. BHIL is not an exception to the rule and, as can be seen, it will always be valued at a discount.

The company has Rs 5,077 crore worth of cash, equity and debt investments on its balance sheet. However, when ascribed value, these investments, give a 30 per cent discount to equity investments, and that means the fair value of the BHIL stock comes to Rs 824 per share.

If equity were to be excluded, then cash on the books (cash and  bank balance, plus debt investments) of the company comes down to Rs 91 per share. With the current market price (CMP) being quoted at Rs 515 and a price-to-earnings (P/E) ratio of 7.47, the stock is trading below its fair value. But with a yield of just 1.99 per cent, on a relative basis, the stock is trading at a premium to its other famous peer, Tata Investment Corporation.

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