IPOs unleash value for shareholders

Listings of subsidiaries reward investors, parent companies

The Thomas Cook stock has gained 26 per cent over the past month given the ongoing listing process for subsidiary Quess Corp. One of the reasons GAIL, too, scaled to its 52-week high recently is due to the listing of Mahanagar Gas, in which the company is one of the largest shareholders. Given the value unlocking, the Street is giving better valuations to the parent whose subsidiary is being listed. The recent examples indicate that is the case.

G Chokkalingam, founder, Equinomics Research and Advisory, says while a common yardstick cannot be applied to all companies, if the subsidiary is in a business which has exciting opportunities, the Street is likely to give a higher price to earnings multiple to it as a separate listed opportunity rather than as part of a consolidated entity. Cases such as Syngene, Snowman, and Gas Authority come to mind. A lot also depends on the phase of the market you are in with bull markets more likely to give a better valuations than otherwise, he adds.

One of the reasons for the value unlocking is the lower value assigned to the parent when its subsidiaries are part of it than when they are independently listed.

According to Ajay Bodke, CEO and chief portfolio manager at Prabhudas Lilladher, there is a conglomerate discount to a holding company or parent when you have multiple businesses in one entity as it makes it difficult for investors to assess the performance, especially if the businesses are distinct. A spin-off or divestment in such cases helps. Thomas Cook is a case in point. While it is in the tourism (tour operator) business, subsidiary Quess Corp is in the staffing solutions segment.

The other point is about offering investors a choice according to their risk appetite and to the businesses they would like to stay in or move out. For example, the business model of Sun Pharma’s research subsidiary SPARC while in the same value chain and sector as the parent, is completely different being long gestation, needing capital infusion, volatile and much riskier (with potential for very high returns) than the parent where growth and cash flows are steady across the years.

A spin-off or listing helps unlock value. The other case in point is the custom synthesis and contract research subsidiary of Biocon called Syngene. While the subsidiary contributed 27 per cent of the consolidated Biocon revenues, its estimated market cap prior to listing was pegged at half the listed parent. Part of the proceeds from the IPO went to the parent, which was the selling shareholder. The listing of the subsidiary gave investors a more steady business compared to the parent, which has an investment-heavy drug discovery programme and needs to fund expansions.

Although some positive news flow in the past year has helped, both Syngene and Biocon (given R&D triggers and value unlocking) have gained 70 per cent since August 2015 when the subsidiary was listed.

The success of some IPOs have also prompted other companies in the sector to unlock value. Consider SRL Diagnostics, the unlisted subsidiary of Fortis Healthcare. Both Dr Lal PathLabs and Thyrocare Technologies are trading at a premium from their issue price with the former gaining 70 per cent from the IPO price while the latter has gained 27 per cent since listing. Fortis could gain if the valuation of SRL (valued at around Rs 4,000 crore), which is similar in size, is pegged anywhere close to Dr Lal PathLabs' market cap of Rs 7,800 crore.