Analyzing Holding Companies
In this section, there is a write-up on valuing holding companies, the pitfalls of doing so, and why a holding company's discount always remains. To explain this, let's assume a holding company valued at a market cap of 1000 crores with a listed value of investments at 1500 crores but if the company had to suddenly sell the shares and distribute the income to its shareholders by way of dividend, it will be subjected to capital gain and dividend distribution tax which would collectively extend between 20% to 40% of the value depending on acquisition costs making the discount a theoretical necessity.
If one wants to make money in a holding company, you must be optimistic about the subsidiaries. Because holding companies are always undervalued. The key to buy holding companies is to look for those entities that consolidate earnings from their subsidiaries.
Good companies grow in free markets and not in regulated environments, so that's why the author avoids businesses which are under direct control of the government. A serious investor should ignore most of the PSU stocks and all such private companies which are under the influence and regulation of policies framed by the government.
The reason is the objective of the investor and the government are not in sync.
The government will come up with policies which will help them become popular thereby compromising shareholders return, whereas the shareholders look for wealth creation which is rarely visible in PSU stocks unless the stock is quite cheap and there is tailwind.