Top 5 Significant Demergers in FY24

In the fiscal year 2024, India witnessed a surge in corporate demergers as companies sought to unlock value and streamline operations. Prominent entities such as Tata Motors, Reliance Industries, Allcargo Logistics, Vedanta, and ITC made strategic moves to split their businesses into separate entities, focusing on specific sectors or verticals. These demergers represent a departure from traditional business structures, aiming to enhance focus, agility, and accountability. From automotive giants segregating commercial and passenger vehicle segments to conglomerates spinning off financial services arms, each demerger underscores a strategic shift towards sustainable growth and value creation. This article explores the top five Indian demergers including both announced or took place during the FY24.

1. Tata Motors

Tata Motors Limited (TML) has approved the demerger into two listed entities – one for Commercial Vehicles (CV) and related investments, and the other for Passenger Vehicles (PV), Electric Vehicles (EV), and Jaguar Land Rover (JLR) businesses. This move follows the successful independent operation of these units under their respective CEOs since 2021. The demerger aims to enhance focus, agility, and accountability, capitalizing on distinct growth strategies. Limited synergies exist between CV and PV, but significant opportunities exist across PV, EV, and JLR, especially in EVs, autonomous vehicles, and vehicle software. Chairman N Chandrasekaran emphasizes the demerger’s role in better capitalizing on market opportunities, improving customer experience, and driving shareholder value.

2. Reliance-Jio Financial

Reliance announced the demerger and subsequent listing of its financial services arm, Reliance Strategic Investments, as Jio Financial Services (JFS). Shareholders received one share of JFS for each share of Reliance held. The appointment of KV Kamath as non-executive chairman and Hitesh Sethia as CEO reflected the company’s commitment to JFS’s success. Analysts anticipated that JFS leveraging extensive data resources and a non-bank finance company license to venture into lending activities. This strategic move aligned with Reliance’s goal of optimizing its structure to maximize shareholder value, focusing on the digital fintech sector’s growth opportunities, and the value unlocking is in turn reflected in the increased share price of the company.

Currently Reliance Industries Ltd shares are trading at Rs 2,912.60 and the shares of Jio Financial Services Ltd are trading at Rs 363.45, up 36% since listing on the exchange.

3. Allcargo Logistics

Allcargo Logistics is undergoing a restructuring process to split its operations into two entities – Allcargo ECU Ltd for international supply chain business and Allcargo Logistics for express and contract logistics. This aims to simplify operations, enhance efficiency, and provide better visibility to investors. Shareholders of Allcargo Gati will receive shares in Allcargo Logistics, and those of Allcargo Logistics will receive shares in Allcargo ECU Ltd. Regulatory approvals are pending, with completion expected in 10-12 months. Analysts view the restructuring positively, expecting improved organizational efficiency and focus on each segment while advising cautious optimism pending further developments.

4. ITC

ITC approved the demerger of its hotel business into ITC Hotels. Shareholders will receive one share in ITC Hotels for every ten shares held in the parent company. ITC Hotels will operate as an independent hospitality-focused listed entity. Shareholders will hold 100% of the hotel business interest through direct and indirect holdings. The shares of ITC Hotels are expected to be listed soon, reflecting ITC’s strategic focus on streamlining its business segments and enhancing shareholder value.

5. Vedanta

Vedanta Ltd has approved the spin-off and separate listing of six business units to boost growth prospects amid challenges faced by Vedanta Resources. The demerger aims to enhance valuations and unlock value. Shareholders will receive additional shares of each listed company for every share of Vedanta Ltd held. The restructuring process is slated for completion by the FY25, subject to regulatory approvals. Hindustan Zinc, a subsidiary, also plans to establish separate entities for its business verticals. Chairman Anil Agarwal anticipates accelerated growth within each vertical post-demerger, furthering Vedanta’s strategic objectives.

Benefits of Demergers

Demergers offer several advantages to companies and their stakeholders. Firstly, they enable businesses to focus on core competencies by separating diverse operations into distinct entities, thereby enhancing operational efficiency and strategic clarity.

Secondly, demergers can unlock shareholder value by allowing investors to better assess and allocate resources to individual businesses based on their specific growth prospects.

Additionally, demergers can mitigate risks associated with conglomerate structures and improve corporate governance by aligning management incentives with the performance of each business segment.

Moreover, demerged entities often enjoy greater flexibility in pursuing growth opportunities, strategic partnerships, and capital allocation strategies tailored to their respective industries. Overall, demergers empower companies to adapt to evolving market dynamics, optimize capital structures, and drive long-term shareholder value.

Conclusion

Demergers have emerged as a significant trend in FY24, with several leading Indian companies opting to restructure their operations. These strategic moves aim to enhance focus, unlock value, and create opportunities for growth in distinct business segments. As companies seek to optimize their structures and cater to evolving market dynamics, demergers are likely to remain a key consideration in the Indian corporate landscape.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.