Fresh investments can be considered in the stock of Bajaj Holdings and Finance. The stock is trading at a deep discount to the current market value of the investments the company holds which may help it in delivering good gains if the market rallies. The discount would also help keep losses at a minimum if the market falls. The rise in the stock price can be aided by underlying stocks moving up.

Bajaj Holdings’ investment portfolio consists of equity stakes in Bajaj Auto (31.5 per cent), Bajaj Finserv (39.2 per cent) and other Bajaj group companies such as Maharashtra Scooters, Bajaj Electricals and Bajaj Hindustan. Apart from these investments, it also holds ICICI Bank, Force Motors and other bluechip stocks. It also has stakes in BSE, CARE Ratings, and National Multi-Commodity Exchange of India Ltd that have potential for value unlocking.

The market value of Bajaj Holdings’ investments worked out to Rs 2,091 a share as of June. The stock price today, at Rs 793, is at a discount of 62 per cent of the underlying portfolio. The discount has, in fact, widened from 52 per cent in March 2009. The key stocks held in the portfolio Bajaj Auto and Bajaj Finserv have gained 16.4 per cent and 30 per cent, respectively, since June. The Bajaj Holdings stock is yet to catch up, gaining only 1.5 per cent.

The stocks of investment companies tend to trade at a discount to their portfolio’s underlying value in the stock market. While a discount of 25-30 per cent is justified, the current discount of 62 per cent is not. The company’s stakes in Bajaj Auto and Bajaj Finserv alone are worth Rs 21,600 crore; Bajaj Holdings’ market capitalisation is Rs 8,832 crore.

Bajaj Auto continues to benefit from best-in-industry margins of 19-20 per cent, thanks to its dominating presence in the mid and premium bike segments and export markets. Bajaj Finserv, on the other hand, is buoyed by profits from life insurance and general insurance businesses and strong profitability of Bajaj Auto Finance.

Bajaj Holdings is also a regular dividend payer. The dividend yield of the stock works out to 3.1 per cent. In 2011-12, dividends per share declined to Rs 25 from Rs 35 in the previous year, given fewer profit-booking opportunities in the market. A similar situation panned out during March 2009 year when the markets underperformed. But, the company had generous payouts in 2009-10 and 2010-11 when markets were upbeat for most part.

The recent market rally may make for more profitable exits and, therefore, higher dividend payouts this year. The company has made use of its internal accruals and increased its equity investments during the current market corrections. Apart from raising its stake in Bajaj Finserv, the company invested Rs 562 crore in other stocks during December 2010 to June 2012. The stock is a defensive bet and might not run up as much as the underlying stocks for prolonged periods of time. Therefore, investors should hold the stock with investment horizon of two years.

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