After reaching a certain size, large companies can best create shareholder value by separating business divisions with distinct characteristics and listing them separately. Many business groups have taken this approach to create shareholder value and the strategy is being put to use at India’s leading companies currently. This trend of corporate demergers is becoming quite prominent in the Indian market. News Source

Strategic Splits for Growth

The fast-moving consumer goods company Hindustan Unilever is separating its ice cream business into an independent listed entity. Among other Nifty 50 companies, ITC is getting ready to list its hotels business, ITC Hotels. Tata Motors is in the process of demerging its businesses into two separate listed companies. Public sector major NTPC has successfully completed an initial public offering for its renewable energy subsidiary, NTPC Green Energy, and is about to list it on the stock exchanges. These are not isolated incidents but part of a larger strategic shift.

Rationale Behind Realignment

The companies may have their own reasons for demerging the business units and listing them separately. Hindustan Unilever’s move follows its parent Unilever’s decision to separate its ice cream business globally. An IPO gives access to funds for NTPC’s capital-intensive renewable energy business. For Tata Motors, the separation of passenger vehicle and commercial vehicle businesses simplifies the organisation structure. Each demerger is carefully considered and executed to meet specific corporate goals.

Value Creation for Investors

Even so, these business realignments can yield tangible benefits for shareholders. For instance, NTPC Green Energy is valued at a premium to its parent. A separate listed ice cream company will help Hindustan Unilever’s investors realise fair value for the business. As such, demergers and separate listing help create independent focused entities. Companies thrive under able managements and markets also reward them. Tata Consumer Products, formed through the merger of the consumer product divisions of Tata group companies and Bajaj Finserv, created from Bajaj Auto, are prime examples in the Nifty 50.

Economic Outlook Remains Positive

Incidentally, the parentage of several companies in the Nifty 50 index can be traced to firms in the benchmark index itself—SBI Life Insurance to State Bank of India and HDFC Life Insurance to HDFC Bank. This demonstrates the ability of large business groups to create scalable businesses — Reliance Industries is a case in point. This wave of demergers comes at a time when the Finance Ministry, in its monthly economic review, maintains a cautiously optimistic outlook on the Indian economy. Ministry Review This positive sentiment, despite global headwinds and inflation concerns, suggests a conducive environment for corporate restructuring and growth.

Focused Entities Reward Markets

Companies such as UltraTech Cement and Hindalco Industries pursued a series of mergers and acquisitions to emerge stronger in their respective businesses. Numerous successful demergers exist outside of Nifty 50 companies as well. Compared to mergers that are said to destroy shareholder value, such transactions have served well for investors in general. The current trend of demergers signals a mature phase in Indian corporate history, where strategic focus and value unlocking are prioritised.

Will this demerger trend continue? Given the potential for enhanced shareholder value and the need for companies to sharpen their focus in a competitive market, we are likely to see more such strategic realignments in the near future. These moves, backed by a cautiously optimistic economic outlook, could well power the next phase of corporate growth in India.