investing but at a discount
Tata Group stocks have been on a roll this year. stocks like Tata Power, Tata Chemicals, Tata Motor, have respectively rallied 195%, 95%, and 164% since the start of 2021. while one may have picked some of them and made a good profit, it is unlikely that many bought into all the group companies at the right time.
what if there was a proxy to have exposure to these Tata Group companies? well, there is one called Tata Investment Corporation, a Non-Banking Financial Company (NBFC) that invests in both listed and unlisted equity and debt instruments.
the primary source of income for TIC is the dividend, interest, and profit from the sale of its investments. its USP is that a major part of TIC’s portfolio consists of Tata Group companies and one could invest in TIC’s stock and get these underlyings at a ‘discount.’
the point to highlight here is that Tata Investment acts as a ‘holding company’ to Tata Groups firms and lets investors have exposure to them.
this ‘holding’ structure isn’t exclusive to Tata Investment and is actually a well-studied phenomenon in the stock market where similar holding companies or holdcos act as an instrument for portfolio diversification.
a holding company is a structure that is made with the intent of controlling other group companies and its aim is to make investments in other group operating companies.
similar to TIC, there are other holdcos in India — such as Bajaj Holdings, Bombay Bumrah, and Maharashtra Scooter — that have investments in various lucrative businesses.
an ideal holdco allows an investor to have exposure in many leading businesses at the same time. such holdcos are a favorite of investors as they can be an efficient and cheap way to own the stocks of some of India’s reputable growing business houses.
what makes them even more lucrative is how these holdcos are at times hedged against various market cycles.
as mentioned earlier, these holdcos trade at a discount to the fair value of the assets they are holding which gives a better margin of safety. a recent report by HDFC Securities said: “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%.”
investors can benefit greatly from such holdcos as their assets are diversified in various sectors which limits the downside risk in them, also as the underlying portfolio appreciates, the holdco stock also rises in value.
take Tata Investment, for example. its stock has rallied 44% year-to-date, in line with the rally of its holding firms.
also, it has been observed that holdcos are generous with dividend payouts, which makes them a source for constant passive income as well.