Triveni’s demerger structure could have been better
Triveni’s demerger structure could have been better
Triveni Engineering and Industries Ltd’s proposed
The steam turbines business, with revenue of Rs475 crore and a segment profit margin of 24% in fiscal 2009, will be demerged into an existing 100% subsidiary, called Triveni Turbines Ltd (TTL). Triveni’s current price-earnings multiple is around 14 times, based on its trailing 12-month earnings per share. In contrast, the BSE Capital Goods Index trades at a multiple of 29 times. TTL should thus get better valuations, especially since it is the most profitable division.
But the structure of the demerger is dilutive. TTL’s existing equity capital is Rs10 crore, and will increase to Rs38.5 crore after issuing shares to Triveni’s shareholders in the ratio of 1:1. That will see its earnings being spread over a larger number of shares. A clean demerger would have seen both companies left with identical equity capital and shareholder structures. The market value of Triveni’s post-demerger stake of 28% in TTL may, of course, reflect in its own share valuation and provide a buffer when the sugar business enters a down cycle. But TTL would have benefited more if its equity capital had remained constant.
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