look news india
Demerger of companies is a financially beneficial option for both the parent companies and the investors.
Companies have benefited from this exercise due to the flow of investment from investors in companies that separated businesses as part of restructuring last year. Because, in many cases due to demergers, it has been observed that the market value has increased as a result of value unlocking. At least 12 domestic companies have sold their businesses in the last one year. After the split, the combined market value of the spin-off and parent companies increased from 14 per cent to 450 per cent. At least six companies such as Edelweiss Financial, Shipping Corporation of India, Towers Holdings, NIIT, GHCL and Forbes & Co. have given at least 50 per cent return after separation.
Edelweiss Financial Services spun off its business into a separate company, Nuvama Wealth Management. One of the biggest gainers. The market capitalisation of Edelweiss Financial on the date of adjustment was Rs 6,281 crore. As against this, the combined market capitalisation of Edelweiss and Nuvama on Monday was Rs 34,579 crore. That translates to a return of 450 per cent as compared to the Nifty's return of 35 per cent during the same period. Nuvama was listed on September 26, 2023. The demerger allows companies to spread value creation across companies by eliminating the holdco discount, which would give a subsidiary a discount to the parent company's valuation if it listed directly.
Shipping Corporation of India spun off its non-core business and real estate into a separate company, Shipping Corporation of India Land and Asset. Which was listed on the market in March this year. The combined market capitalisation of these companies rose 250 per cent to Rs 15,333 crore from pre-adjustment in March last year. This is compared to the Nifty's 44 per cent return during this period.
According to market experts, investors invest better in fragmented businesses by separating high-growth verticals. Managing independently helps such separated companies accelerate their goals, optimize capital allocation, align better with industry trends, promote sustainable value creation. Additionally, entities that hold a disproportionate share of a company's debt often face low valuations. Separating such units can correct this imbalance.
Currently, a dozen companies including ITC, Vedanta, HEG, Arvind and QS Corp have announced demerger. However, this process of demerger will take 12 to 18 months to complete.