With rapid growth high on its radar again, India Inc is getting more focused. And it?s not just by the mergers and acquisitions that India Inc is playing its game; de-mergers, too, are taking it forward. Even as repeated calls for the Air India and Indian Airlines de-merger are gaining ground, India Inc has already stepped up its de-merger process to give out a loud and clear message, with the first quarter of the year witnessing biggies such as Unitech, Triveni, M&M, Dalmia Cement and Vedanta Resources all taking the hive-off route.
Neerav Merchant, associate partner, Majmudar & Co, explains that ever since the Reliance Group de-merged?primarily to segregate control and ownership of companies between the Ambani brothers?more corporate houses have been looking at de-mergers as a meaningful option. The downside is less and the upside includes tax benefits, focused management, fund raising and unlocking the shareholder value. He adds, ?De-mergers directly relate to fund raising, as resultant companies consider raising capital via an IPO or ADR/GDR listing aboard.?
Recently Dalmia Cement Bharat (DCBL) approved the de-merger of its cement and power business into a separate company, Dalmia Bharat Enterprises (DBEL), and announced that DBEL will become a public listed holding firm of cement and power businesses by the end of the year. Puneet Dalmia, managing director of the company, had reportedly said how ?the de-merger would accelerate growth and increase fire power and provide flexibility in raising funds for future growth and expansion.?
In a similar vein, Triveni Engineering & Industries (TEIL), with its business of manufacturing sugar, steam turbines, and projects and engineering activities, announced the de-merger of its wholly-owned steam turbine business into a separate company, enabling it to raise funds from strategic partners for expansion for the de-merged unit. Says Manish Kapur, executive director (M&A tax), KPMG, ?With the momentum in the economic scenario, India Inc will certainly witness more de-mergers, with Indian corporate groups realising that diversifying is the mantra of the day. Identifying areas to focus on and segregation of non-core activities is a reality and attracts more investor interest in businesses.?
Experts point out that investing in de-merged entities has been good for investors. As Merchant explains, de-mergers become a good option when investors express interest in investing in a particular business unit rather than a company as a whole. ?De-merged entities attract a premium, as the earlier discount gets written off,? he adds. A sentiment also echoed by Rohit Madan, research director, VCCEdge, ?Stock markets have a tendency to undervalue stocks of conglomerates. De-mergers work best when there are differences in valuation of a company?s varied businesses. By creating different entities, the company hopes that they would be valued in their own right and one business would not pull down valuation of another. Segregating the two helps in enhancing management focus and also attracts a larger pool of investors who want to invest in particular sectors.?
Abhijeet A Biswas, director, Equirus Capital, corroborates this: ?The market views de-merger as a more focused strategy on the part of management and promoters. Studies have proven that a diversified conglomerate does not provide the best value to shareholders. This is because a certain business segment might drive down the valuation of the entire company. The market, too, is confused about the principal shareholder?s main interests and often undervalues the entire firm.?
As per news reports, Vardhman Group may hive off its steel business. Recently, M& M announced the de-merger of non-fruit business of its subsidiary Mahindra Shubhlabh Services Ltd (MSSL) into a separate company. CG Srividya, partner, specialist advisory services, Grant Thornton, explains that Indian conglomerates have multiple companies and businesses that are mostly in different points of the business lifecycle. It, therefore, becomes important for managements to evaluate these structures and business synergies periodically to check if anything needs to be changed to improve business performance and shareholders? interests. Industry experts point out that the advantages of de-mergers are not limited to investors, but also a very tax-efficient manner of separating business for the management. Even Unitech is all set to hive off its investment in non-core business which is valued at around Rs 9,000 crore as compared to Rs 18,269 crore of real estate. ?The objective behind the de-merger is to create two separate listed entities that will allow for a sharper business focus. The move will also enable the management to raise funds more easily in the non-core entity as compared to the real estate business. We see value-accretion for investors from the spin-off.? Dinesh Arora, executive director, financial advisory services, PwC, rounds up, ?Corporate houses in India are getting more focused, so there would be lot of de-mergers in the long run. It is difficult to differentiate the good from the ordinary in a growing market, but this is not a 100-metre dash. People who stay focused win a marathon and you can see the difference clearly between who is running and who is walking.?