A COUPLE OF COMPANIES WITH THE NEW TREND OF DEMERGER

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.

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 whollyowned 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 Zuaris case.
One reason that helps the parent firms 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.

Disclaimer
The investment advice or guidance provided by way of recommendations, reports or other ways are solely the personal views of the
research team. Users are advised to use the data for the purpose of information and rely on their own judgment while making
investment decision.
Dynamic Equities Pvt. Ltd - SEBI Investment Advisory Reg. No.: INA300002022

Disclosure
Dynamic Equities Pvt. Ltd. is a member of NSE, BSE, MCX SX and a DP with NSDL & CDSL. It is also engaged in Investment Advisory
Services and Portfolio Management Services. Dynamic Commodities Pvt. Ltd., associate company, is a member of MCX & NCDEX. We
declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are
registered. SEBI, Exchanges and Depositories have conducted the routine inspection and based on their observations have issued
advise letters or levied minor penalty on for certain operational deviations.
Answers to the Best of our knowledge and belief of Dynamic/ its Associates/ Research Analyst: DYNAMIC/its Associates/ Research
Analyst/ his Relative:

Do not have any financial interest / any actual/beneficial ownership in the subject company.
Do not have any other material conflict of interest at the time of publication of the research report
Have not received any compensation from the subject company in the past twelve months
Have not managed or co-managed public offering of securities for the subject company.
Have not received any compensation for brokerage services or any products / services or any compensation or other
benefits from the subject company, nor engaged in market making activity for the subject company
Have not served as an officer, director or employee of the subject company

Article Written by
Tanaya Nath