Value unlocking: How demerged entities helped create value for itself and wealth for investors

Indian markets have remained steady and stagnant now for more than two years at the broad level. The NIFTY50 trades ~10% below the record high levels, first touched in September 2024. The index has remained in broad range and reduced the excitement of retail investors who looked for opportunities of higher returns. However, at the individual stock specific level, the Indian market has delivered plenty of opportunities for higher returns in the recent few years.

Some stocks rallied owing to thematic recovery in the sector or industry, while others rallied owing to stock specific developments such as demergers and spinoffs. Vedanta is the latest example, where the company has unlocked value for shareholders by demerging its different business segments, to get better value proposition for each business. This is not the first time, such value discovery happened which rewarded investors. Over the long term period, the value unlocking opportunities have turned out to be major wealth creating opportunities for Investors. Here’s how value unlocking works.

The value unlocking opportunities exist where two or more standalone businesses exist under one parent entity. However, the true potential or value is not discovered when valued together under the parent entity. The demerger or spinoff is primarily done to get better value and price discovery for conglomerate, removing the conglomerate discount. The demerger and or spinoff is also beneficial for the company as post-demerger, the better valuation is helpful in assessing true value of the business and helps in raising the fund for growth and capex at higher valuation. Pre-demerger, the market bundled the high performance and weak performing business together, which somewhere impacts the fund raising capacity for the quality business.

For shareholders, it gives opportunity to own pure play business, which helps eliminate the headwinds and risks from other non-organic businesses. Additionally, it also helps the demerged entity to arrive its true potential and valuation, which can be higher than the residual parent entity.

Orient Paper and Orient Electric

Orient Paper & Industries Ltd housed both its core paper and fast growing FMEG (Fast Movable Electronic Good) segment. The paper business is highly capital intensive and yields less margin than the electrical goods segment. In 2018, the electrical business was carved out and listed separately as Orient Electric. After the listing, the electrical goods entity found its true value and generated immense wealth for investors after multple re-rating. Today, the legacy Orient Paper entity is trading at ₹366 crore market capitalization and Orient Electric trades at ₹3,786 crore. On listing, the market valued paper business at ₹1,000 crore and Electric business at ₹3,000 crore, the gap later widened as the paper business trades at ₹3,786 crore and the paper business at ₹366 crore.

Vedanta and Vedanta Aluminum

The recent example is Vedanta and its aluminium business segment, which drives the majority of its revenue and profits. Post listing, Vedanta Aluminium commanded a market capitalisation of over ₹1.7 lakh crore, higher than the residual Vedanta Ltd at ₹1.12 lakh crore as investors bet heavily on the pure play aluminium segments.

Before the demerger, the company’s assets and liabilities were bundled together, preventing the company from arriving at its true valuation. After the demerger, investors can now bet on the pure play Aluminum business, which is likely to benefit from the tailwinds for sectors like green energy transition and rising demand from the EV segment. Anil Agarwal, Chairman of the Vedanta group, said each demerged entity could become a $100 billion business entity, providing potential value and wealth creation opportunity for investors.

Disclaimer: This article is purely for informational purposes and should not be considered investment advice from Upstox. Please consult with a financial advisor before making any investment decisions.