Up to 450% gain in m-cap! Demerged cos unlock big gains for investors

Investors betting on companies that have split business as part of restructuring in the past year have struck it rich as unlocking value on account of the demerger has resulted in the market value soaring in several cases. At least 12 domestic companies have demerged their businesses in the last one year, according to an ET study. Of these, the total combined market value of the demerged and parent companies went up by 14% to 450% after the split.

At least six companies Edelweiss Financial, Shipping Corp of India, TVS Holdings, NIIT, GHCL and Forbes & Co returned a minimum of 50% after the demerger.

Edelweiss Financial Services, which demerged its wealth business into a separate company, Nuvama Wealth Management, was one of the biggest gainers. The market capitalisation of Edelweiss Financial on the adjustment date was Rs 6,281 crore, while the combined market cap of Edelweiss and Nuvama on Monday stood at Rs 34,579 crore, delivering a 450% return compared to Nifty’s 35% during the same period. Nuvama was listed on September 26, 2023.

“Demergers allow companies to enjoy value creation across entities while subverting the Holdco discount, which would put a discount on the parent company’s valuation if a direct subsidiary is listed,” said Gaurav Sood, head of equity capital markets at Avendus Capital.Shipping Corporation of India demerged its non-core business and real estate into a separate company, Shipping Corporation of India Land and Assets, which was listed in March this year. The combined market capitalization of these companies has increased by 250% since pre-adjustment in March last year to Rs 15,333 crore, compared to Nifty’s 44% returns during this period.

By spinning off high-growth verticals, investors are able to assign better value to hived-off businesses. “As businesses mature, operating independently allows them to sharpen their focus, optimise capital allocation, and better align with industry trends, fostering sustained value creation,” said Sood. “Additionally, entities that hold a disproportionate share of a company’s debt often face undervaluation; demerging these units can correct this imbalance.”

Currently, at least a dozen companies, including ITC, Vedanta, HEG, Arvind, and Quess Corp among others, have announced demerger. The process could take 12 to 18 months to complete.

The demerger of Sundaram Clayton from TVS Holdings and its subsequent listing has resulted in the combined market capitalisation go up by 212% since August last year compared to a 28% rise in the benchmark index. Similarly, NIIT and NIIT Learning System together have generated over 70% returns since June last year.

Demergers Unlock Big Gains

“Demerger allows theme-specific or sector-specific funds to invest in focused businesses, as these funds are restricted from investing in diversified companies,” said Ravi Sardana, an investment banker. “Additionally, managing standalone businesses is often more efficient than overseeing multiple businesses, leading to better operational effectiveness.”

One of the most awaited in recent times was the demerger of hotel business from ITC in August 2023. As part of the split, ITC shareholders will receive one ITC Hotels share for 10 ITC shares.

Vedanta, India’s largest diversified natural resources company, last September announced plans to separate its six core businesses — aluminium, oil & gas, power, steel and ferrous materials, and base metals divisions into separate companies, while zinc and newly incubated businesses will remain under Vedanta.

The Raymond Group demerged its lifestyle business into Raymond Lifestyle, and announced the demerger of its real estate business into Raymond Realty.