The demerger is the latest trend that has been picking up pace in India of late. Companies are turning more agile than ever while promoters are becoming opportunistic. Name it value unlocking or corporate strategic realignment; the rich valuations dominated by certain businesses on the Street have witnessed companies making a beeline to demerge parts of their businesses which are in vogue on the Street. The drift of value unlocking by demerging business units is quickly picking up in India with a couple of companies announcing the demerger of their businesses in the past three months, quoting sharper focus for each of the entities and unlocking of shareholder value. This sort of rush is in sharp to contrast to any past trend when only 10 companies had announced the demerger in 2015, and 11 in 2014.

Why Demergers?

Greater focus on each of the entities formed and unlocking of shareholder value are some reasons. Historical data of recent years suggests that the demergers have resulted in significant value unlocking for both parent and demerged entities. Over the past few years, companies that have been listed after the demerger from their parent companies have created handsome returns for investors. Of the top eleven demerged entities by market cap, six of them have given returns of 112-662 per cent, one has risen 48 per cent and four have fallen by four to 52 per cent.

A COUPLE OF COMPANIES WITH THE NEW TREND OF DEMERGER

Stocks like NRB Industrial Bearings, Orient Cement, Star Ferro and Cement, Marico Kaya, Welspun Enterprise and Gulf Oil Lubricants are leading performing demerged stocks. Intellect Design Arena, products business of information technology company Polaris, has yielded 48 per cent returns since listing on December 18, 2014. These companies were demerged for all the correct reasons, which have helped in considerable value creation. The other reasons for the demergers are the value expansion in hot segments like how some companies have created and listed separate entities in some of the segments like retail or fashion.

Companies Demerging this FY so far:

Balaji Telefilms: On 4th October, the board of directors of Balaji Telefilms have considered and approved the demerger between the Company and Balaji Motion Pictures Limited (BMPL).

IIFL Holdings: On 2nd October, IIFL Holdings has decided to demerge '5Paisa Digital Undertaking' from IIFL Holdings Ltd (IIFL) into its fully owned subsidiary 5Paisa Capital Ltd (5Paisa).

Sintex Industries: Last week, Sintex Industrie has announced the demerger of its moulding and prefab business into a separate company. It said that the main reason for such action is to streamline various businesses, thereby creating a focused leadership.

Orient Paper: On 22nd September, The Board of Orient Paper has given the consent for the vertical demerger of consumer electric business of the Company into a wholly owned subsidiary to be incorporated.

Den Networks: On 6th September Den Networks announced the demerger of its broadband/internet service provider arm Skynet Cable Network. The demerger was done to attain structural and operational efficiency, improve competitiveness and greater accountability and to have a focused attention in the ISP business.

Reliance Communications: On June 24th, Reliance Telecom Ltd, a wholly-owned subsidiary of Reliance Communications, will demerge its operations in five circles back into RCom. This will allow customers to access seamless 3G and 4G services. The move was also aimed at combining all of RCom's wireless business under one unit to be demerged at a later date and merged with Aircel, as per the ongoing discussions between the promoters of both parties.

How good are Demergers?

Whether the demergers work depends on the motivation. If there is a better focus, a new management team and specialists rather than generalists running the show, the odds that the business would grow faster is higher. It also helps if the market is dominated by Bulls.

Parent companies have given mixed stock performance since the demerger. However, that has to be seen in the light of the fact that the value of the parent company is no longer a summation of the parts but of a single entity. If the returns of the parent and demerged entities are taken as one, the gains are significant. Among Parent Companies Orient Paper, NRB Bearings and Century Plywoods have rallied the most, by 229-722 per cent after demerging their subsidiaries. Marico share price has rallied 57 per cent since the demerger of Marico Kaya in July 2014.

Polaris went up 43 per cent since December 2014, when its demerged business of Intellect was listed. Future Retail and Jindal Poly Films have rallied 36 per cent and 29 per cent, respectively. On the other hand, Gulf Oil Corporation, Welspun share price and Zuari Global has fallen by four to 36 per cent after the demerger. But, if the returns of the demerged entity are considered, the total returns are respectable, except in Zuari’s case. One reason that helps the parent firm’s stock performance is steady disappearance of the holding company discount. Analysts usually assign a holding company a discount of 15-30 per cent on parent entities holding multiple subsidiaries. The reason is that conglomerates normally trade at a discount due to murkiness in capital allocation. After the demerger this discount disappears and helps in the stock performance of the parent companies. Consequently, the share price tracks the financial performance of these companies. During the previous Bull Run some companies went on a diversification drive beyond their central businesses. However, many of them have now become aware that the diversified business module did not work well regarding stock valuations and fund raising compared to companies that stayed focused on their core business.

Over the past year, companies that have been listed after the demerger have generated attractive returns for investors except for IDFC. For example, Crompton Greaves which demerged its consumer products business into a different company named Crompton Greaves Consumer Electrical have given a return of 57% together since its record date on March 16, 2016. Sensex has gained 14% during this period. Here, the Street is looking at a trend that has taken the market with storm. There are several big names that qualify for the demerger but nothing has been heard from them. The market is keeping a keen eye on the upcoming demergers.

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Article Written by Tanaya Nath