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S. Vaidya Nathan

A FRESH spell of corporate restructuring is likely to add depth to the equity market, make it more attractive to foreign institutional investors and unlock value for shareholders. Robust restructuring initiatives — mergers, demergers, asset sell-offs, takeovers and strategic partnerships — can be expected in companies across such sectors as cement, media and financial services.

Ensuring survival, improving competitiveness and prodding a sluggish economy as it opened up to global competition were the principal drivers for India Inc's restructuring between 1998 and 2003. In contrast, the restructuring activity ahead will be driven by companies strengthening their core businesses.

Most restructuring candidates have fine-tuned their operations to be competitive. Starting with healthy operating margins, the initiatives will likely result in higher earnings, unlocking value for shareholders as the stocks of these new-look companies may enjoy a higher price earnings multiple. Here is a list of the likely rejig candidates over one-to-three years.

Grasim/Indian Rayon/UltraTech: This restructuring has been a possibility for a couple of years now. As Grasim now has firm control over UltraTech Cement, which it acquired from Larsen & Toubro, the Aditya Birla group is well placed to push ahead with the recasting.

This is likely to result in pure plays from the group in cement, textiles, chemicals and in an investment vehicle with stakes in asset management and insurance. These may attract greater investor interest.

If Grasim's viscose staple fibre business is tagged either to the cement or the textiles business, it could be a sweetener as it is a cash-generator. The textiles entity would then have a reasonable level of integration and be one of the larger companies by revenues. Grasim would become the numero uno in cement.

If you want to play this theme, which may take a year or two to spool out, buy into Grasim and stay invested in Indian Rayon.

HDFC/HDFC Bank: Unlike the ICICI group, these two entities have opted to remain separate companies. But as home financing has become a commodity, with banks becoming big players, the raison d'etre for HDFC to continue as a separate entity gets weaker by the day; it does enjoy tax benefits but it can trade them for the flexibility to source funds at lower rates. This may make more sense now as the interest-rate-decline story seems to have ended.

A combined entity may command even greater strength; it would have a market cap of about Rs 40,000 crore, the cleanest balance-sheet in the financial sector and an unmatched record of healthy growth on a big base. HDFC Bank could buy out HDFC in a share swap.

The top management maintains that a merger is not on the drawing board. But the factors that favour integration are likely to prevail. Foreign investors own about 70 per cent of the equity in HDFC and HDFC Bank. And the FIIs may be favourably inclined towards a merger.

The small-cap GRUH Finance could be an integral part of such a restructuring as HDFC holds a 60 per cent stake in it. Regulatory constraints may impose costs that could strain earnings for a year or two. But that may not deter investor fancy.

Stay invested in both these stocks. Expect IPOs for the insurance and asset management businesses and, possibly, HDFC Securities, a play in the high growth financial services sector over a three-year period.

ACC as an MNC play: Holcim may have failed to buy a stake of over 50 per cent in ACC. But it is likely to pursue this through secondary market purchases and a buyout of the stake held by Gujarat Ambuja in Ambuja Cement India. This could happen a couple of years from now.

Gujarat Ambuja has the option of selling its 33 per cent stake in Ambuja Cement India any time before December 2007. Holcim has a right to buy this stake from January 2008.

Gujarat Ambuja may prefer to clinch a deal towards the end of this period as it could get a far higher price. Holcim could then integrate ACC, Ambuja Cement India and Ambuja Cement Eastern, get a higher stake in the process and offer investors the first MNC cement play in India. We are bullish on ACC under the Holcim umbrella and more so about such a merged entity.

PSU banks: Consolidation in the banking sector has been advocated repeatedly over the past few months. There may be political resistance, but the Government may strike a compromise to ensure that progress is gradual and involves only a few banks, with safeguards to ensure that employee interests are protected by legislation.

The focus could be on banks with a lean workforce, as that could remove fears of job losses. Two PSU banks that would fit the bill are Corporation Bank and Oriental Bank of Commerce. They also complement each other well in terms of geographic footprint. That LIC — an entity likely to remain fully owned by the government — owns about 26 per cent in each may also make it easier to market this story.

LIC, too, could be interested in owning part of such an entity. This could, however, be deferred till OBC's financial burden of its bailout of Global Trust Bank eases. LIC Housing Finance could also be a participant as it could ensure a higher stake for LIC in the merged entity. Stay invested with LIC Housing and Corporation Bank.

United Spirits: Herbertsons, Shaw Wallace, Triumph Distillers and McDowell are to come under the banner of United Spirits. Litigation could delay the process, which may take a couple of years. The merged entity could attract enhanced institutional investor interest.

Its status as the dominant player in the liquor business, and the removal of uncertainties regarding the timing of the merger and risks of swap ratio, could lead to a higher valuation. And greater transparency would be an additional and crucial positive.

Century Textiles: With companies such as Kesoram Industries, Jayshree Tea and Birla Tyres in its fold, the B. K. Birla group is a prime candidate for restructuring initiatives. Driving the restructuring could be the attractiveness that the textiles and cement businesses would enjoy as pure plays in these sectors.

In textiles, Century has an integrated presence, with revenues of over Rs 1,000 crore, strength in exports and a foray into branded garments under the `Cottons' banner.

These attributes have been richly rewarded in the pure textile plays. Across companies, the group has capacities of about 8 million tonnes in cement, though the valuations enjoyed now do not reflect this strength. But the complicated web of investments could take time to reorganise, delay the recast process.

As the group assets are likely to pass on to Mr Kumarmangalam Birla, the cement business is unlikely to be on the block, though it may be coveted by MNCs now that ACC is with Holcim.

Mahindra & Mahindra: After being in the dumps between 1999 and 2003, M&M has regained investor fancy. It has several outfits in such areas as consulting, specialised software services, telecom, trading, auto components, holiday resorts, realty and financial services.

As M&M could need sizeable fund infusion to finance its growing ambitions in the world of automobiles, it could divest a part of its stake in its subsidiaries.

This could enhance the value that the market attaches to the group and could also lead to a higher valuation for the M&M stock. Track IPO progress in Mahindra & Mahindra Financial Services, Mahindra Holiday Resorts and Mahindra British Telecom, as they could be in the vanguard of any push by the group to list closely-held outfits.

Chambal group: Its presence in fertilisers is spread across such companies as Zuari Industries and Chambal Fertilisers. An integrated entity could provide benefits of synergy and a higher valuation.

Competitors such as Tata Chemicals and Coromandel have emerged as integrated fertiliser companies with portfolios comprising both urea and phosphatic fertilisers. As Italcementi may also want complete control of the cement business, it could buy out the K. K. Birla group in the cement business.

Last but not least, watch EIH for a move by ITC, which holds a stake of a tad less than 15 per cent. Also in the hotels business, Indian Hotels, Indian Resort, Oriental Hotels and Taj GVK could come under a single banner to shift to a larger scale of operations.

Investing in potential restructuring stories calls for a high-risk appetite and patience as expectations may only be borne out over a longer time-frame. But the rewards will be attractive.

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