India focused Portfolio Advisory - Exp of 40+years, Das Capital Management and Advisors

Arun Thirumalai

India focused Portfolio Advisory - Exp of 40+years

Das Capital Management and Advisors

Das Capital is a research boutique with an aim to continuously map and plan the investment needs of investors focused on India. We have a six member research team with a combined experience of over 40 years as a part of our investment wing. Our team assisted in the setup of Premji Investments, which was one of India’s first family offices focused to managing Mr.Azim Premji personal wealth. We also serve as a research team to two Indian private equity energy funds “Small is Beautiful” and “KSK Emerging India Energy Fund”.

Equity Bottom-Up

IntroductionThe AV Birla Group run by Kumar Mangalam operates multiple businesses across various industries and geographies. The group recently announced the merger of two of its flagship conglomerates Grasim and Aditya Birla Nuvo. In this report, we try to analyze the impact to minority shareholders of the two companies and also the intent of the management to effect this merger.The process explainedMerger of Grasim Industries&amp; Aditya Birla Nuvo and Spinoff of Financial Services SubsidiariesBoth Grasim and Aditya Birla Nuvo are holding companies of the Kumar Mangalam led AV Birla Group, with operations in diverse fields. Grasim gets a major portion of its value from its holding in UltraTech Cement while Aditya Birla Nuvo from its Financial Services subsidiaries and Idea Telecommunications.The group has decided to merge Grasim &amp; ABNuvo and separately list the financial services business. The proposed de-merger, which is effective from the date appointed by the court, will result in two entities:<ul><li>Grasim-merged: Grasim Industries the new merged entity, will become a larger holding company consisting of all subsidiaries in Nuvo (excluding any business in financial services).It will get the chemical business and telecom business additional to its existing cement and viscose business. We feel that this will only increase the holding company discount on Grasim and complicate the business model even more. We don’t see any value being unlocked in this entity through the merger.</li><li>Aditya Birla Financial Services: All of ABNuvo’s financial services subsidiaries, including insurance, will be listed under a separate entity. We feel this entity will see significant unlocking of value once listed as the holding companies currently see a discount of around 40% to the fair value of the business.</li><li>Post merger, Grasim would hold 57% of this business with the remainder of the shares being distributed to the shareholders of post-merger Grasim (shareholders would receive 7 shares of Aditya Birla Financial Services for every 1 share of post-merger Grasim).</li><li>It is also to be noted that promoter holding in the merged entity will go up to around 39% from 31% holding in Grasim currently. By this merger promoters have successfully increased their shareholding in the highly valuable cement business of UltraTech and the same time unlocking value in the financial business. All this has been achieved without any capital being invested by the promoter group. In our opinion, this was one of the key objectives for this merger.</li><li>Shareholders of AB Nuvo would get 3 shares of post-merger Grasim for every 10 shares of Nuvo.</li></ul> Recommendation:<ul><li>Grasim shareholders would not stand to gain or lose as prices have run up post the correction (It had seen a decline of 10% from a high of Rs.5348/share after the merger announcement). The per share value of Grasim Industries (currently at Rs.4850/share) is expected to fall due to the equity dilution of 30% post the merger. However, there will be gains when the financial services company lists (shareholders will get 7 shares of Financial services for every 1 share held) . Therefore, at the CMP of Rs.4850/share and prior to the Financial Services Business listing , the stock appears to be fairly valued.</li><li>Aditya Birla Nuvo shares have corrected significantly (down 15% from Rs.1632/share to Rs.1381/share) since the merger announcement and we feel that it presents an opportunity at the current price of Rs.1381/share. AV Nuvo shareholders will receive 3 shares of Grasim and 21 shares of Aditya Birla Financial Services for every 10 shares of Nuvo. We estimate the fair value of  these businesses is 6% higher than value implied in the current share price. </li></ul>

IntroductionThe AV Birla Group run by Kumar Mangalam operates multiple businesses across various industries and geographies. The group recently announced the merger of two of its flagship conglomerates Grasim and Aditya Birla Nuvo. In this report, we try to analyze the impact to minority shareholders of the two companies and also the intent of the management to effect this merger.The process explainedMerger of Grasim Industries&amp; Aditya Birla Nuvo and Spinoff of Financial Services SubsidiariesBoth Grasim and Aditya Birla Nuvo are holding companies of the Kumar Mangalam led AV Birla Group, with operations in diverse fields. Grasim gets a major portion of its value from its holding in UltraTech Cement while Aditya Birla Nuvo from its Financial Services subsidiaries and Idea Telecommunications.The group has decided to merge Grasim &amp; ABNuvo and separately list the financial services business. The proposed de-merger, which is effective from the date appointed by the court, will result in two entities:Grasim-merged: Grasim Industries the new merged entity, will become a larger holding company consisting of all subsidiaries in Nuvo (excluding any business in financial services).It will get the chemical business and telecom business additional to its existing cement and viscose business. We feel that this will only increase the holding company discount on Grasim and complicate the business model even more. We don’t see any value being unlocked in this entity through the merger.Aditya Birla Financial Services: All of ABNuvo’s financial services subsidiaries, including insurance, will be listed under a separate entity. We feel this entity will see significant unlocking of value once listed as the holding companies currently see a discount of around 40% to the fair value of the business.Post merger, Grasim would hold 57% of this business with the remainder of the shares being distributed to the shareholders of post-merger Grasim (shareholders would receive 7 shares of Aditya Birla Financial Services for every 1 share of post-merger Grasim).It is also to be noted that promoter holding in the merged entity will go up to around 39% from 31% holding in Grasim currently. By this merger promoters have successfully increased their shareholding in the highly valuable cement business of UltraTech and the same time unlocking value in the financial business. All this has been achieved without any capital being invested by the promoter group. In our opinion, this was one of the key objectives for this merger.Shareholders of AB Nuvo would get 3 shares of post-merger Grasim for every 10 shares of Nuvo. Recommendation:Grasim shareholders would not stand to gain or lose as prices have run up post the correction (It had seen a decline of 10% from a high of Rs.5348/share after the merger announcement). The per share value of Grasim Industries (currently at Rs.4850/share) is expected to fall due to the equity dilution of 30% post the merger. However, there will be gains when the financial services company lists (shareholders will get 7 shares of Financial services for every 1 share held) . Therefore, at the CMP of Rs.4850/share and prior to the Financial Services Business listing , the stock appears to be fairly valued.Aditya Birla Nuvo shares have corrected significantly (down 15% from Rs.1632/share to Rs.1381/share) since the merger announcement and we feel that it presents an opportunity at the current price of Rs.1381/share. AV Nuvo shareholders will receive 3 shares of Grasim and 21 shares of Aditya Birla Financial Services for every 10 shares of Nuvo. We estimate the fair value of  these businesses is 6% higher than value implied in the current share price. 

Grasim Industries & Aditya Birla Nuvo: Marginal Positive Post Correction on Merger Announcement.