The latest announcement by B K Birla to transfer the group’s flagship, Kesoram Industries, to his grandson Kumar Mangalam Birla and not his daughter as indicated earlier has come as a pleasant surprise to shareholders. For many years now, investors have been hoping for a spin-off of the tyre division into a separate company, so that Kesoram remains a pure-play cement major.
This is expected to unlock significant value for the shareholders, as we believe that the tyre business is not fully valued in the present scheme of things. Too much diversification has depressed the valuation of the entire company. Kesoram currently trades at a 50% discount to its peers in the cement and tyre industry. At its current stock price, the company is valued at 7 times its trailing-four quarters earnings per share. In contrast, Madras Cement is valued at over 11 times its trailing EPS, while Apollo Tyres is valued at 13 times its trailing EPS.
Though the announcement doesn’t amount to a demerger of the company, the probability of restructuring is now higher. The AV Birla group owns large cement assets and has declared its intention to become one of the world’s largest players in the sector. Kesoram’s cement assets with annual capacity of 4.5 million fits nicely with group’s long-term vision. In the past, Kumar Birla has demonstrated his preference for companies with focused product lines and there is no reason to believe that he won’t do the same with Kesoram’s assets after assuming control. The company’s tyre division is likely to be spun-off into a separate company, while textile and chemical division could be merged with other group companies with similar businesses.
The demerger will boost market valuation and may give more management focus to the varied businesses. There is also a possibility that the A V Birla group may decide to exit the tyre business by selling it to a suitable suitor, not a bad idea from retail investor’s point of view.