Tube Investments regains lustre as investors angle for demerger gains

The Tube Investments of India Ltd stock had fallen after its restructuring plan was announced in early-November but has recovered now. The company plans to demerge its manufacturing business comprising auto components and engineering products into one firm, and investments in financial services into a separate entity.

Investors will hold shares in both companies post-demerger. The residual firm will hold stakes in its financial services units, notably in Cholamandalam Investment and Finance Co. Ltd and Cholamandalam MS General Insurance Co. Ltd.

The nearing of the demerger date, with Tube Investments slated to get approvals in a month or so, is seen as a trigger as the demerger is expected to create value for shareholders.

Daljeet S. Kohli, head of research at IndiaNivesh Securities Ltd, says the demerger gives two clear choices to investors. Also, the financial services business may get a better valuation, as it is seeing better earnings growth compared to the manufacturing side.

Still, the holding company structure does not go away altogether and can lead to a discount to the underlying value. Tube Investments does not own 100% stakes in the underlying units; it owns 46% in Cholamandalam Investment and Finance, 60% in Cholamandalam MS General Insurance, and 49.5% in Cholamandalam MS Risk Services Ltd.

Still, the stakes are significant and may be seen more as an operating company structure than a holding firm, says Amar Ambani, head of research at IIFL Wealth Management Ltd. That could lower the discount.

Cholamandalam Investment is already listed while the general insurance business is unlisted. Listing of the general insurance business may be another trigger for valuations. A favourable secondary market and increasing listings of general insurance firms can help Cholamandalam MS General Insurance derive better value, according to broking firm Sharekhan Ltd.

Sharekhan points to the recent stake sale in ICICI Lombard General Insurance Co. which happened at a significant premium to earlier transactions. “We believe post the listing of financial services company as different entity, there will be better value discovery for general insurance business, which itself has potential to provide 15-20% upside to current valuation of Tube Investments India,” Sharekhan said in a note.

While the commentary may seem upbeat, timely completion of the demerger and the holding company discount will be key for investors seeking gains from Tube Investments’ restructuring exercise.