How to Value a Holding Company?

Holding company is a company that is created to buy and own the shares of other companies. They either don’t have an active business apart from investments or it’s a very small part in comparison to their investment corpus.

Therefore, traditional valuation techniques are not adequate to value these companies. We will take up a holding company and try to value it.

Godrej Industries is the holding company of one of the most respected business groups in India. It also has its own business involving chemicals, edible oils and finance. Let’s understand the business model and structure of this company.

The company has substantial shareholding in other Godrej companies, and it derives majority of its value from its investment in group companies.

Valuation

The Enterprise Value of Godrej industries is roughly Rs 22,800 Crores. Now we cannot value this company based on sales or earnings because it’s an investment company. Thereby, the best way to value this company is to compare its Enterprise value to the value of its investments.

Now, let’s find out the value of Godrej Industries Stake in these companies.

Total Value of Godrej Industries’ Investment at today’s (13^th Feb 2019) Valuation

= (17180 + 11190 + 5560) Crore = Rs 33930 Crore (Figures in Approx.)

So, the EV of Godrej Industries is roughly 22.8K Crores while the Value of its investments is 33.9K Crores.

This basically means that you are being offered a bank locker that has Rs 33.9K for a price of 22.8K.

Will you take that offer? What is the Maximum Price that you would pay?

The bank locker has certain charges attached to it such as yearly maintenance fee, so the maximum I would pay for a locker that has 33.9K is 33.9K  -  (maintenance fee of a few years + a slight discount).

Similarly, you shouldn’t pay 33.9K crore for Godrej industries because holding companies usually trade at 25-30% holding discount. This Discount is justified because holding company incurs administrative costs, compliance costs and taxation. So, the Value of all those is deducted from the value of its investments.

But in the case of Godrej industries, you are getting investment worth 33.9K Crores for just @22.8k Crores, which is a discount of almost 32%.

Besides, so far, we have only calculated the value of investments. Don’t forget that Godrej Industries also runs its standalone business. Which if valued at 1 year of revenue and 20 times past 10 years average profit, comes out to be roughly 2k Crores.

So Here is a company with investments + Own Business valued at 36K crores, available at 23K crores. A discount of 36%! Is that reasonable? Depends on whether the underlying investments are overvalued or undervalued.

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