The investment book

One of the key angles to making an investment work is to figure out a ‘catalyst' which could unlock the value you perceive in an investment. While most such catalysts would range from market conditions to operational factors, investors can look at the investments held by the companies also a possible trigger. Here’s a brief on how you can value the investments a company holds.

Picking up stake

A company, through the course of years of operations, accumulates cash. Now it has various avenues to deploy the hard-earned cash, ranging from expanding its own operations to picking up stakes in other firms it views as potential acquisition targets or simply as a great investment opportunity. For example, ITC’s stake in Hotel Leela and EIH, which it has always maintained, is only an investment opportunity.

Companies also pick up a stake in other companies prior to launching an effort to merge or acquire that company. Such a move could be viewed as a strategic. Notably, such investments could also come along as a result of the promoter using the company as a conduit to funnel other forays. Tata Steel's holding in Tata Motors and Tata Teleservices and Hindalco's holding in Idea Cellular are instances of this.

Another possibility is a split in a business empire, leading to shares being distributed among siblings. This could result in secret troves of value in a company's books. The O.P Jindal group, whose companies include JSW Steel, Jindal Steel and Power, Jindal SAW and Jindal Stainless, have holdings in each other. The split of the Ambani business group in 2006 between the two brothers is another example here.

Then there are investment holding companies that exist for the sole purpose of holding stakes in other companies (which may be either listed or unlisted). Companies of this type include JSW Holdings, Bajaj Holdings and Tata Investment Corp, among others.

Where to find this

The ‘investments' heading first turns up in the company's balance-sheet, with a more detailed breakdown held by the company appearing under the ‘Schedules of the Balance-Sheet' later in the annual report.

Investments are of two types, current and long term, with the former held for a year or less and the latter for longer durations. Both current and long-term investments are held at cost value. This is the acquisition cost, which includes the cash spent or the fair value of the shares, assets dispensed in exchange for the investment plus expenses (includes brokerage costs, advisory fees etc). The company may also hold land or property as investments on their book. Adjustments could be made annually to the carrying cost when there are permanent changes in the value of the investments.

Management control

Know that an investment differs from an associate or a subsidiary in that it is bereft of management control. JSW Steel's holding in Jindal Steel and Power is classified as an investment as also the ITC’s stake in EIH.

For example, Tata Steel's standalone balance-sheet has a subsidiary titled ‘Tata Steel Holdings', which is a conduit for the company's European operations and holdings.

But should investors value the investment book of the company before investing in it? Know that ascribing a specific value per share for a company's listed investments has its limitations. For one, the investor has little say on when, if ever, a company might decide to liquidate its investment in a certain entity and at what price. Two, it would be a daunting exercise to ascribe a per share value to a company with a sizable unquoted investment book. That said, being in the know of a company's investment book can prove to be handy, especially if the company decides to unlock its investments.

However, it would not be wise to base investment decisions solely on the company's investment book; investors need have a great deal of conviction.

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