India Inc takes demerger route to unlock value

Investors Too Gain As Prices Of
Demerged Entities See Major Jump

Mar 07, 2007
Ashish Rukhaiyar
MUMBAI

EVEN as large Indian corporate houses were busy adding value to their businesses by acquiring global biggies, back home, many were trying to unlock value in their existing activity by demerging into different entities.

Over the past one year, many Indian companies have demerged into two or more different units, with each focusing on specific areas of business. And, if the stock prices of the demerged entities are anything to go by, the market has definitely given a thumbs-up to most demergers.

The classic case of an Indian demerger has been that of Reliance Industries (RIL) wherein four different entities were carved out of India’s largest private sector company in 2006.

Incidentally, investors who stayed with the company during the time of the demerger have been handsomely rewarded, with the stock prices of all the entities witnessing a splendid rise.

In last one year, companies like Zee, Great Eastern Shipping, Torrent Power, GTL Infrastructure, KEC International and Network 18 have been demerged and the stock prices of most of the demerged entities are still ruling at a considerable premium, as compared to the listing price.

Market participants also opine that a demerger helps in unlocking value and bringing more focus in the business. The separate entity is able to attract a premium due to the full enterprise value of the new entity.

Girish Nadkarni, COO (investment banking & institutional equity), IL&FS Investsmart, says, “Experience shows that investing in demerged entities has been good for investors. It is better for companies as it brings more focus.”

Wire & Wireless India was demerged from Zee Telefilms and was listed on the BSE on January 10, 2007. The list price was Rs 80 and it is currently trading at Rs 94.85 — premium of nearly 19%. On January 11, the stock had touched a high of Rs 139.90.

Similarly, KEC International, which was demerged to manage the power transmission business of KEC Infrastructure, closed at Rs 521. It was listed on October 3, 2006 at Rs 425. In February, the stock had touched a high of Rs 599.

Torrent Power, on the other hand, is trading at a premium of nearly 4% at Rs 62.30, after listing on November 28, 2006 at Rs 60. It touched a high of Rs 99.90 on November 30, 2006.

Network 18 Fincap has also gained ground after being listed on February 2, 2007. It is currently trading at Rs 341.45, as against its issue price of Rs 300. It has touched a high of Rs 446.50 on February 19.

Commenting on demergers, Ajay Padval, VP (PMS), Mehta Equities, is of the view that in India, when the different business activities are a part of the single main entity, market tends to discount its true value. Once demerged, the entity is able to attract a premium as the earlier discount is written off and the asset value and the enterprise value are fully priced.

In a nutshell, a demerged entity is priced at its real value and so the shareholders are more often that not, rewarded. However, at the same time, demerged entities like Zee News, Great Offshore and GTL Infrastructure have moved into negative territory after listing.