Analysts see Kesoram demerger

Birla patriarch, B K Birla's decision to give Kesoram Industries to his grandson Kumarmangalam Birla has brought to focus the possibility of unlocking value in Kesoram through the demerger of its two main businesses - cement and tyre.

Analysts say these businesses could be spun off into different entities when they go to Kumarmangalam. The possibility of Kesoram demerger is gaining credence because valuations of single-product companies are higher than multi-product ones.

For instance, Kesoram Industries trades at 7.8 times in FY07, while single product companies like Shree Cement trade at 21 times and it is 11.3 times for Apollo Tyres.

The broad contours of restructuring Kesoram's cement division that are being discussed are centred around deriving marketing and other operational synergies with other Aditya Birla group cement companies.

For instance, Kesoram's cement division with a capacity of 2.9 million tonnes, contributed nearly 46 per cent to the company's FY07 net sales, and is largely focussed on the western and southern markets.

Meanwhile, the Aditya Birla group companies (Grasim, UltraTech and Shree Digvijay) sell nearly 22 per cent of their 31 million tonne cement capacity in the south, while in the western market it is 29 per cent, say analysts.

If the Birla group (Aditya Birla plus B K) goes in for further consolidation of its cement business, it would be able to leverage Century Textiles (cement capacity of 6.3 million tonnes) and Mangalam Cement (capacity of 1 million tonnes), taking the total group capacity to 38.3 million tonnes at the end of FY07. Birla's main competitor, the Holcim group (consisting of ACC and Gujarat Ambuja), currently has 35.2 million tonnes cement capacity.

In Kesoram's other business - tyres, analysts see the possibility of separating it from Kesoram and bringing in a foreign partner, in a bid to improve the profitability of this division.

For instance, the segment profit margin of the tyre division in FY07 was 4.4 per cent, as compared to 29.6 per cent for the cement division.

Also, given the different operating environments for Kesoram's businesses, sales  grew at a compounded  annual growth rate of 12.4 per cent between March 2000 and March 2007. Single-product companies such as Dalmia Cement have  grown 17.4 per cent in the same period.