In our article titled ‘Diversified auto portfolio on sale’ in bl.portfolio edition dated October 17, 2021, we had recommended that investors accumulate the stock of Sundaram Finance Holdings (SFH). This was suggested for investors who were willing to play the waiting game, as wealth creation in holding companies is not necessarily linked to the business performance of investee companies. It is more linked with investor perception and preferences that get reflected in holding company discounts. The advantage for a patient investor, though, is that deep value in stocks gets recognised at some point in time.
Our positive view on SFH was based on this thesis. At price of ₹78 in October 2021, the stock was trading at holding company discount of 42 per cent. This was after baking in some conservative assumptions in ascertaining the value of a few assets (a few unlisted investments valued at carrying value). After largely being range-bound between 70 and 100 for nearly two years (till July 2023), the stock has seen a lot of investor interest and wealth creation in the last one year.
Today, post 250 per cent returns and trading at ₹274.70, the holding company discount has shrunk to 13 per cent now (22 per cent, when cash and liquid investments are included). Our thesis has largely played out and we think there is not much value left from a holding company perspective and hence recommend that investors book profits.
Company
SFH was spun off from Sundaram Finance as part of a demerger scheme in 2018. Till then it was a wholly-owned subsidiary of Sundaram Finance with the main objective of engaging in the business of investments, including investments in financial services enablers, fin-tech investments. As part of the demerger, the investments of Sundaram Finance in companies engaged in non-financial services were vested with SFH.
These non-controlling investments consist of a portfolio of auto component companies mainly from within the TVS group, such as Wheels India, Brakes India, TVS Holdings (formerly Sundaram Clayton), Lucas-TVS, etc. Thus, the company had a diversified portfolio of investments in the auto and auto components space. Almost the entire value of the company was derived from the worth of these underlying investments as the company’s standalone operations were not material relatively.
Much of the worth of these investments was not reflected in shares of SFH. At the time of our positive view, the holding company discount was at 42 per cent on a conservative basis. Some of the significant unlisted investments were reflected at carrying value, which indicated conservative accounting. However, in FY23, the company changed its accounting policy for its investments in associate companies from cost basis to fair value.
Hence, today, when we consider the value of its listed investments (based on current market price) and worth of its unlisted investments (reflecting fair value now), we get a reasonably clear picture on the worth of its investments. The underlying investments are worth nearly ₹7,000 crore. As against this, its current market cap at ₹6,062 crore, implies a 13 per cent discount now.
The company has liquid investments and cash of around ₹850 crore and no significant liabilities. When this is considered, the holding company discount is higher at 23 per cent. However, this is not much cause for comfort as 22 per cent discount is low based on historical data for holding company discounts, with the discounts having been as high as 85 per cent for some listed holdcos.
Further, if and when the company sells any of its holdings to realise value, there will be tax liabilities related to capital gains. Hence, considering the entire cash and liquid investments, too, to arrive at Holdco discount, while not wrong, may not be prudent. The company’s standalone operations remain relatively small and immaterial to its financials.
Recently there have been some positive moves by SEBI with introduction of special call auction mechanism for price discovery of listed holding companies that meet certain criteria. However, this may not have much impact on SFH in whose case the price discovery has appeared to play out well in the last one year. Further, the stock has also not reacted to this move by SEBI a few weeks back, while other holdcos with deeper discounts have.