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Oct 09, 2017

Demerger Season: Stock Markets Are Seeing Many New Listings

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Indian conglomerates have been known to keep their multiple businesses under one roof. But the market dynamics have taken a turn now with a host of corporates choosing to split their businesses and re-list them on the exchanges.

Last year, several companies hived off operations, including Reliance Capital, Grasim, Tube Investments, CESC, Prakash Industries, Crompton Greaves and Sintex Industries among others. Recently, CESC, the flagship company of the Sanjiv Goenka group, announced that, to unlock value, it would split its businesses into four units, i.e., power generation, power distribution, retailing and business process outsourcing, with effect from 1 October, and that the shares of the hived-off entities will be listed in due course.

A few months ago, the Aditya Birla group announced a three-part split, consolidating its financial services businesses under one roof and culminating in the recent listing of the Aditya Birla Capital stock on the bourses. The company has a market share worth Rs 40,419 crore. Reliance Capital hived off its home-finance arm and gave shareholders one share for every share held in the Reliance Home Finance arm. It is worth Rs 4,845 crore on the exchanges.

In the past few years, several companies have seen structural changes in their businesses including conglomerates such as the Zee Group and the Adani Group, while several smaller companies have split their businesses intending to list the hived-off entities on the stock exchanges.

There are many reasons for the corporates to split their businesses into different entities and list them on the bourses. For starters, the stock market is booming, and shareholders want to cash in on the opportunity to unlock shareholder value. Second, hiving off gives managements the opportunity to focus better on the new business. Third, it changes the capital structure of the company, giving each new entity the opportunity to utilise capital appropriately.

For instance, Crompton Greaves was quoting at Rs 75-80 before demerger. Now CG Power’s stock is trading at Rs 80, and Crompton Consumer’s at Rs 214. The value unlocking process has led to the current combined price of Rs 294.

Ditto for Sintex. Before the demerger, Sintex Industries was quoting at Rs 80. Now post the split, after, the entities are quoting at a combined value of Rs 120, with Sintex Plastics at Rs 93, and Sintex Industries at Rs 27.

Says Manoj Kumar, partner and head of M&A and Transactions at legal and corporate advisory firm Corporate Professionals Capital: “As consolidation of businesses, vertical or horizontal, creates economies of scale and increase competitiveness, hiving off unrelated businesses helps to unlock value in the businesses. ”

In a booming stock market, it may be part opportunistic and part strategic to list the spin-offs as separate ventures. For investors looking to invest in specific industries, multi-disciplinary companies are not the preferred chioce. Many a times, large diversified conglomerates do not get the market value they deserve as some division or the other drags down valuations.