By Shriram Subramanian,
In FY25, several Indian companies have announced demergers, aiming to create value by breaking up into focused, independent entities. Examples include Raymond, Vedanta, Quess Corp, and Jio Financial, while companies such as Sanofi, Siemens, ITC, and Bombay Dyeing are following suit. The rationale behind these moves is clear: by separating unrelated business units, companies can streamline operations, improve management focus, optimise capital allocation, and unlock shareholder value. Demergers allow each entity to pursue niche growth strategies and respond more effectively to their respective markets.
Rationale for demergers
The core motivation for demerging is to unlock the growth potential of each business by granting them autonomy.
Raymond, for instance, is separating its lifestyle and real estate businesses, offering investors a clearer view of each segment’s performance and potential. After the demerger, Raymond will focus solely on its engineering business. Meanwhile, the lifestyle arm, with its global apparel presence, offers investors a chance to back a specialised player in a growing market.
Similarly, Vedanta’s decision to split into six companies, housing its aluminium, base metals, and other commodity businesses, aims to better manage the individual commodity cycles. By focusing on specific sectors, Vedanta can optimise capital allocation and operations for each company.
Focused management and operational efficiency
One of the key benefits of demergers is the ability to create more focused management structures. Conglomerates often suffer from a lack of clarity in strategic decision-making because of competing priorities across business units. When these businesses operate as standalone entities, management can focus exclusively on the needs and challenges of that sector, leading to improved operational efficiency.
In global cases, General Electric’s break-up allowed its aviation, healthcare, and power businesses to focus on their respective markets. Similarly, United Technologies’ demerger into Carrier (refrigeration) and Otis (elevators) allowed for more streamlined operations and clearer strategies.
Better capital allocation
In a conglomerate structure, capital allocation can often be a balancing act between competing units, each with different needs. Demergers allow each business to independently raise capital, optimise debt, and allocate resources to its specific needs. This leads to more efficient capital deployment, as sector-specific businesses can make targeted investments that better align with their growth strategies. For example, a standalone aluminium business may have different capital needs than a base metals business, and being part of the same conglomerate may dilute investment in both. By separating, each entity can attract capital aligned with its own growth opportunities.
In the case of ITC, hotel would be more capital-intensive than a fast-moving consumer goods business. In Vedanta, the aluminium business can now pursue strategies tailored to the cyclical market, while the base metals businesses can focus on their own supply-demand dynamics. Similarly, Raymond’s real estate unit can take on more project-level debt and have its own capital allocation strategies independently of the lifestyle business.
Unlocking shareholder value
One of the main reasons why companies demerge is to unlock shareholder value. Conglomerates are often undervalued because investors apply a “conglomerate discount”, reflecting the complexity and perceived inefficiencies of managing unrelated businesses under one roof. By splitting into more focused entities, companies can often achieve higher market valuations.
Investors can value each demerged company based on its specific performance and prospects rather than applying a blanket valuation to the conglomerate. This approach often leads to higher aggregate valuations for the individual businesses than the combined entity would have achieved. For example, when General Electric broke up into separate companies, the market responded positively, recognising the increased transparency and focus of each business. Similarly, the break-up of United Technologies allowed investors to value Carrier and Otis separately, leading to higher valuations for both entities.
In India, Raymond’s demerger offers investors a clearer view of its lifestyle and real estate businesses, potentially unlocking value that was previously obscured. Vedanta’s break-up is likely to attract investors interested in specific commodities, leading to higher valuations for each segment.
Attracting sector-specific investors
Demergers can also help attract a broader range of investors. In India, the rise of theme-based funds and the growing interest in mid- and small-cap stocks make demerged entities more attractive. Investors often prefer to invest in companies with clear and focused business models, making demerged entities appealing.
For instance, Raymond’s lifestyle business may attract investors interested in apparel while its real estate unit may appeal to those focused on property development. By providing clarity in their investment propositions demerged firms can attract more specialised investors, which can boost stock performance.
Moreover, smaller, more focused companies tend to be more transparent, which can further boost investor confidence. By reducing complexity, demergers allow investors to better understand the risks and opportunities in each business, leading to more informed investment decisions.
Demergers offer numerous benefits to companies and investors alike. By simplifying corporate structures, improving management focus, and optimising capital allocation, demergers can unlock shareholder value and attract a broader range of investors. India’s recent wave of demergers will be closely watched, as these companies seek to maximise value and drive growth through more focused and efficient operations. As the market continues to evolve, the success of these demergers will provide valuable insights into how companies can best leverage this strategy to create long-term value for shareholders.
The author is Founder and MD, InGovern Research Services. Views are personal.
