Demerger bets - 1

Post the demerger of Sintex Plastics Technology from Sintex Industries and the resulting gains that accrued to shareholders of the pre-demerger parent Sintex Industries, there is certainly merit in evaluating other companies which are going the same way. In the case of Sintex, the Sum-Of-The-Parts (SOTP) was always going to be greater than the whole as the market usually discounts the bundled company fairly highly over the individual businesses. The same story is likely to play out in the case of Reliance Capital (RC), ADAG group’s financial services flagship.

RC houses a lot of lucrative businesses under its fold. These businesses individually would be valued way more than what the whole of RC is currently valued at. This is where the SOTP principle comes into play. And at long last, ADAG seems to have realized this. To be fair, it is not easy to demerge an entire unit, much less list it on the exchanges, unless it achieves a certain scale and has the ability to sustain itself through its own earnings rather than relying on the parent. We have seen this happening in the case of L&T Finance. Another recent case is that of Max Financial Services. Both are promising businesses and have highly pedigreed promoters and management. They are sure to stand credibly on their own in the years to come after coming out of their parent’s shadow. A similar case is likely to play out in the case of RC as well. 2 of the most promising businesses that it houses are the MF (Asset Management) and Insurance (Life as well as General/non-Life), both of which are now doing extremely well. This can be gauged by the fact that Nippon of Japan holds half of the MF business and also has a significant stake in both the Insurance businesses. And the names of all 3 companies reflect this. MF constitutes nearly 27%, General Insurance (GI) nearly 11% and Life Insurance nearly 18% of the current RC. If they were to be separately listed, the SOTP is likely to be way higher than the proportion suggests. Of course it is too early to get into the numbers game right now before the Investment bankers crunch the figures and bring out their valuation reports.

The other silver lining is that ADAG group has made its intention of listing both of these businesses (only the General Insurance, GI, for now) in the near future, both having filed DRHP with SEBI. That would be case of huge value unlocking here. That there is appetite for both these areas in the market can be gauged from the fact that 2 other big groups also have shown interest in going in a similar direction (ICICI with listing of ICICI Lombard, its GI subsidiary, and UTI with its MF business).

Apart from the above key businesses, RC still has other related business like Retail Broking, another hot area which is picking up (look at Motilal Oswal and Geojit’s stock trajectory over the 2-3 years), Consumer and Commercial Finance (look at where Bajaj Finance is and still going strong), Commodity (trading in precious metals like Gold,, Silver etc.) to name the key ones. Retail broking is a small part currently constituting only about 3% while the Financing business is a large chunk of about 28%.

This is only half the story. While the above value unlocking of the MF and Insurance businesses will happen over the next few months, the more immediate gains are likely due to the demerge of the Housing Finance business in the next few days. This is nearly 13% of the current RC. HF is one business area which has caught the fancy of the markets with most stocks in this space having doubled or tripled in the last 2 years (just look at DHFL, LICHFL etc.). Most NBFCs in the HF business have handsomely rewarded their investors. And so too will Reliance HF post its demerger and listing on the bourses.

With HF out of the way, rest of RC as explained above still has a lot of value which will be unravelled over the next few weeks and months. So it would be best to start SIPing this over the next few weeks/months to gain the most from the market volatility and participating in the value unlocking.

While short term gains are certainly there for the asking, over a longer term also, these businesses are likely to compound at healthy growth rates, thus giving everyone a choice as to their holding period.