Away from the umbrella, India Inc unlocks value

• After Jio Financial Services and ITC Hotels, many groups like JSW, Tatas and more have plans to unlock value across businesses.
• Conglomerates are discounted by the markets and hiving off subsidiaries is a good idea, say stock market experts.
• Tatas, Adani and JSW group also have plans to hive off subsidiaries and raise funds via IPOs.
  

Conglomerates are chaotic and which is why they tend to trade at a discount. Indian promoters have realised that unlocking value by demerging these businesses is not a bad thing after all. Large Indian business houses have been expanding their wings – entering into new territories and incubating new businesses. Now many of them like JSW group, Adani Group and Tatas, like Reliance Industries, could also look at unlocking value from them.

The rally in shares of Reliance Industries ahead of Jio Fin’s listing has added $7.6 billion to Mukesh Ambani’s wealth this year. He is currently the 11th richest man in the world with a wealth of $94.6 billion.

After listing Jio Financial Services, Reliance is expected to hive off its retail and telecom businesses into separate entities. Its buyout of minorities/potential investors in Reliance Retail and the stabilizing of telecom capex, all indicate towards unlocking value, says a recent report by Bernstein.

The 'path to potential IPOs' a key medium term catalyst for Reliance, says the research firm, which sees a 19% upside on the company stock.

Escaping the conglomerate discount

ITC, which has tobacco, FMCG and agri businesses under the parent company, has recently announced its plans to hive off its hotels business — with a 10:1 scheme. The capex heavy business exiting the fold is also good news for the stock.

“The demerged business would be able to raise and deploy its own capital to fund growth of the hotels business and ensure it remains on top amongst peers. Synergies between hotels and other ITC businesses like foods should largely remain unaffected given that the new entity would remain an associate of ITC,” said J M Financial.

The research firm estimates that post-tax return on invested capital (ROIC) will rise, and can drive valuation-multiple further up for ITC as a whole.

Stock market experts say that conglomerates are discounted when they are a part of holding companies — and their real value comes to fore only as individual entities.

“Under a holding company structure, markets undervalue business. Subsidiary companies are discounted anywhere between 20-40% in the sum of the parts (SOTP) valuation method,” says Gaurav Dua, head of research at Sharekhan.

Dua says that while it’s important for new businesses to be incubated under a parent company as they need capex and other support, they also need to be hived off after a critical stage. Many group companies are now in the process of doing so.

Tatas, Adanis & JSW

The Tata group also has many businesses that have hit critical size and scale. It has already filed a draft red herring prospectus (DRHP) for two of its businesses. Tata Play is one of India’s top DTH players with a customer base of over 20 million.

Tata Technologies has also filed a DRHP. The company is owned by Tata Motors, and offers engineering, research and development services for the auto sector. This IPO will also help Tata Motors retire some of its debt.

Sajjan Jindal-led JSW group has also filed a DRHP for its ports business, JSW Infrastructure to raise as much as ₹2,800 crore. It also has plans to hive off its cement business under JSW Cement — in the next two years if the market is conducive.

Before the Hindenburg Research allegations hit the group, the Adanis had spoken of their plans to bring three more IPOs into the market. It had plans to hive off Adani Airport Holdings and its green hydrogen business from Adani Enterprises by end of the year and go in for an IPO by 2028. It also had plans to list Adani Road Transport, AdaniConneX which houses its data center business.

However, as the new busy season of IPOs is afoot, value unlocking is not a game only only of the large companies. Mid and small sized companies too are taking the route as seen with SAT Industries that hived off Aeroflex Industries and is now in the process of raising funds via an initial public offer.