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Having taken a rap on their knuckles during their first outing, most holding companies are working on a course correction. Mayank Singh reports

Fourteen years ago, when oil traded at US$10 a barrel and there were few takers for indust-rial projects, Oman and Emirates Investment Holding Company (OEIHC) was born out of a novel vision. Concerned about the sluggish pace of growth the governments of Oman and the UAE joined hands to give OEIHC a flying start with a seed capital of RO30mn. The company invested in a number of projects and for a while it seemed to be living up to its promise of being an employment-generator and project-maker. Not for long though. Faulty investment decisions, bad management and bad loans saw the company lose RO24mn, or 80 per cent of its share capital, by 1998.

Topsy turvy world

OEIHC has since found its feet (see box on pg49) and its boom-to-bust and bust-to-boom story is not an isolated case. Almost every company in the holding company space, with a few exceptions like Ominvest, which has registered profits year-on-year since inception, has gone through the same process. However, the last couple of years has seen most of them recovering lost ground. Having found their feet they are now prospecting for new growth opportunities.

While it is difficult to pinpoint a single reason as to why so many of them went under, one can hazard a guess. Lack of managerial expertise seems to have played an important part in the failure of these companies. Says Akbar Habib, CEO, ONIC, "In a single product (or category) company, one is aware of issues like the market, demand as well as the environment in which it operates. A holding company faces multifarious challenges, requiring one to have a diverse background and an aptitude to learn."
The structure of a holding company is far more complex than an automobile or steel company. It has various layers the first one is a subsidiary. Subsidiaries are companies in which a holding company has a controlling stake (usually 51 per cent or above) along with managerial control. Al Ahlia Insurance Company and National Life are subsidiaries of ONIC. The second layer comprises associate companies Ð these are the ones in which the parent company's stake stands anywhere between 20-50 per cent. The stake gives the holding company a certain amount of influence but no overall control in the entity. Oman Orix Leasing, Gulf Warranties and International General Insurance fall in this category for ONIC. Finally, there are strategic investments which are capped at 20 per cent. These are usually portfolio investments made on the bourses. The difference has meant that most holding companies have had to burn their fingers before they really came to grip with the business. The knowledge gained in the process is now being put to good use.

Reading the wrong one

Backing the wrong horse has been another common mistake exhibited by a number of them. A misplaced zeal to be part of the country's development saw a number of companies floating manufacturing companies. TransGulf Investments invested in Gulf Stone and Flexible Industrial Packaging. As losses at these companies mounted it realised its mistake and has since exited both the ventures. A limited domestic market and an inability to carve a regional imprint meant that most industrial product ventures stood a thin chance against competition. Says Lakshmi Narasimhan, deputy general manager - investment, Transgulf Investment, "The learning curve for industrial greenfield projects is a long and slow one but the profile of our shareholders is not such that they can take such a long-term view."

With the shareholders expecting quick and constant returns there was a need to look at sectors which could guarantee that. After groping in the dark most holding companies have finally found their proverbial pot of gold. Says Krishna Kumar Gupta, CEO, Al Anwar Holding, "To maximise wealth one needs to be in the financial services sector. As the sector is more developed in the GCC region it is easier to make money." While sectors like automobile distribution and oil and gas are equally or more profitable, most of them are either unlisted or closely held companies making external participation almost impossible. This makes financial services sector the preferred choice.

The experience of companies like Ominvest underlines the argument. The company has earned steady returns from its investments in the financial sector. Ominvest owns 50.99 per cent in Oman Arab Bank has given a cash dividend of RO45.05mn since its inception in 1983. The company also has the enviable record of making a profit year-on-year since inception.

Changing tracks

The constant need to create shareholder value has led companies like Al Anwar and TransGulf to explore new possibilities in financial services. Transgulf has used its associate company Al Madina Financial and Investment to invest in companies like Taageer Finance. The company ventured into insurance in 2006 as the founder-promoter of Al Madina Gulf Insurance. Al Anwar has become an associate of Falcon Insurance in 2005. The company is working on increasing its stake in Falcon to 51 per cent over the next few years.

It has recently taken a 25 per cent stake in a Saudi Arabia based financial services company for RO20mn. A change of course is helping these companies to regain their foothold in the market. Investing in financial services is not within everyone's reach as it requires deep pockets and expertise. Says Mohammed al Kindi, CEO, Al Batinah Development and Holding, "The size of our capital (RO3mn) does not allow us to enter into the financial sector."

Not content at that, Al Anwar has taken a decision that could change the fundamentals of the sector in the years ahead. The company has positioned itself as a private equity house which is willing to exit a business at the right price. Says Gupta, "If we feel that an investment has matured and is giving us good value then we will offload that either partially or fully. Our philosophy is to promote, nurture and exit to share wealth with others.".

Portfolio investment

Compared to private equity firms, holding companies face an unenviable predicament. Says Habib, "Unlike private equity firms which are not accountable to the markets
(as they are not listed), we have to strike a balance between long-term returns and short-term expectations."

Private equity firms are judged by their shareholders over a ten-year-plus period while holding companies are held accountable from quarter-to-quarter by public shareholders. This makes it important for holding companies to have a good portfolio of proprietary investments (on the sharemarket) which can be exited at any moment to meet shareholder expectations.

While there is a degree of unanimity on which sector to back amongst holding companies, when it comes to portfolio management it is a case of to each his own. On the conservative end are companies like OEIHC which has invested RO15mn of its equity in BankMuscat bonds for steady returns. Says Awad Bamkhalef, CEO, OEIHC, "On the investment front our strategy has been to minimise stock market shocks. Fixed earning loan instruments and government securities found a place in our investment book which establishes a stable cashflow." The company is wiser by experience. The 1996 stock market crash hit OEIHC badly as it was overexposed on the bourses. Companies like Al Batinah Holding use BankMuscat to manage its discretionary portfolio. The returns for the company have been in line with the MSM growth. Its portfolio of RO300,000 in 2005 with the bank is now worth RO420,000.

Despite the presence of companies like ONIC which has attracted investors like Abraaj, Shuaa Capital and Dubai Financials there is a feeling that the stock markets do not give holding companies the kind of valuation they deserve. ONIC has a price earnings ratio (PE) of 4.51 and Al Anwar a PE of 4.2 compared to BankMuscat, which trades at a PE of 17.4. Says Bamkhalef, "While all the downside risks Ð as reflected in the published financials are adequately discounted in the market price, the inherent gains embedded in the holding companies are likely to be missed more often by the investors." Others disagree. "The market is not so broad that they will get a price earnings ratio of 10-12. Most holding companies get a PE ratio of 3-4 which is justified," says Nirav Parikh, research analyst, United Securities. With the economy in a growth trajectory, the industry is upbeat about its prospects. Says Kindi, "If we do not do well now, we will never do well.