These Indian Bluechip Companies Could Demerge in 2025. Big Gains Ahead?

Large companies often house diverse businesses under one roof, each with distinct value drivers and operating environments.

Take Mahindra & Mahindra, for example. Its automobile and IT businesses have different dynamics and should be valued separately. While it might seem logical to sum up the value of these segments, it's rarely that simple.

Investors are often wary of large, diversified firms due to concerns about management focus and lack of transparency, leading to a conglomerate discount.

However, when companies demerge their businesses, this discount can disappear, and the core business may see its value surge.

In 2025, several Indian bluechip companies may opt to demerge, unlocking substantial value.

Here's a look at 5 such companies that could offer significant investor gains if they do.

#1 Hindustan Unilever

First on our list is Hindustan Unilever.

FMCG giant Hindustan Unilever (HUL) has announced plans to demerge its ice cream business into an independent, listed entity.

Under the proposal, HUL's shareholders will receive shares in the new company based on their existing holdings in HUL.

The move is aimed at creating a focused, standalone ice cream business that will be better positioned to execute strategies tailored to its unique market dynamics, ultimately unlocking its full potential and delivering greater value for shareholders.

HUL's ice cream portfolio, which includes popular brands like Kwality Wall's, Magnum, and Cornetto, contributes around 3% of its total revenue.

The company faces competition from both local players such as Amul, Mother Dairy, Vadilal, and Naturals, as well as international brands like Baskin Robbins.

India's ice cream market is expected to exceed US$ 5 billion (bn) by FY25, driven by increasing demand for premium ice creams, according to Wazir Advisors.

HUL's premium offerings, particularly Magnum, have been performing well, bolstered by growing in-home consumption via online platforms. HUL's premium ice cream segment has significantly outpaced the broader market, and the company expects this momentum to continue.

This demerger aligns with HUL's broader strategy of unlocking value by creating more nimble and focused entities, each better suited to drive growth in their respective markets.

Hindustan Unilever Financial Snapshot (2020-24)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
Revenue Growth (%)	1.39%	17.38%	11.10%	15.92%	2.64%
Operating Margin (%)	22.94%	22.86%	22.52%	21.64%	21.95%
Net Profit Margin (%)	14.79%	15.19%	15.26%	14.97%	14.59%
Return on Capital Employed(%)	114.74%	38.36%	24.77%	27.06%	28.06%
Return on Equity (%)	84.25%	28.63%	18.37%	20.42%	20.26%

Source: Equitymaster

HUL's sales have grown at an 8% 5-year CAGR, while net profit has increased by 10%. Its 5-year average RoE is 27%, driven by strong performance across its core segments.

The company is focusing on accelerating portfolio enhancement with an emphasis on premiumisation, while its core business is expected to grow in line with market trends.

HUL is reshaping its beauty and wellbeing portfolio to address changing consumer demands, with a stronger personal care segment featuring superior soap formulations.

The homecare segment is likely to continue its solid performance, although increasing consumption in nutrition will be challenging.

Premiumisation remains a top priority, with margin gains being reinvested to drive category development and double-digit profit growth through revenue expansion.

To know more about the company, check out its financial factsheet and latest financial results.

#2 Tata Motors

Next on our list is Tata Motors.

Tata Motors plans to split its passenger and commercial vehicle businesses into two separate listed entities. Expected to conclude in 12-15 months, this move aims to unlock value, enhance agility, and streamline operations.

The commercial vehicle (CV) business will form one entity, while passenger vehicles (PV), including electric vehicles (EVs) and Jaguar Land Rover (JLR), will make up the second.

Shares will be split 1:1, with identical stakes for shareholders in both companies. Pending approvals, the demerger aligns with Tata Motors' strategy to bolster growth and accountability.

The commercial vehicle segment, with a 41.7% domestic market share, differs significantly from the PV and EV businesses, which have driven Tata Motors' growth. Separating these segments allows targeted strategies for each.

This move follows years of preparation. In 2020, Tata Motors separated its PV division, and in 2021, independent leadership was established for CV, PV, and JLR. By 2022, Tata Passenger Electric Mobility was formed, achieving a US$ 9.1 bn valuation after investments from TPG Rise Climate.

In FY23, PVs, including JLR, contributed 79% of Tata Motors' Rs 3.4 trillion (tn) revenue, while CVs added 21%. Recent performance highlights include a 20% YoY rise in PV sales in February 2024, with EVs comprising 13.5% of sales.

The CV sales showed mixed results, with revenues up 19.2% YoY in the December quarter despite a dip in volumes.

The demerger aims to unlock synergies within PV, EV, and JLR while addressing CV-specific challenges. As India's most valuable automaker with a marketcap exceeding Rs 3.3 tn, Tata Motors' bold step could deliver substantial gains in 2025 and beyond.

Tata Motors Financial Snapshot (2020-24)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
Revenue Growth (%)	-13.55%	-3.47%	10.69%	23.98%	26.57%
Operating Margin (%)	8.03%	13.98%	9.97%	10.57%	14.95%
Net Profit Margin (%)	-4.20%	-5.21%	-4.03%	0.78%	7.26%
Return on Capital Employed(%)	-1.92%	-1.27%	1.23%	7.67%	21.41%
Return on Equity (%)	-17.94%	-22.17%	-22.53%	5.99%	48.90%

Source: Equitymaster

Tata Motors has achieved a sales CAGR of 7.7% over the past five years. The company's average RoCE over the same period is 5.4%.

To know more about the company, check out its financial factsheet and latest financial results.

#3 ITC

Third on our list is ITC.

ITC is once again in the spotlight with talks of a potential demerger gaining traction. The company appears poised to move away from its conglomerate structure and list its hotel business.

ITC has received approval from the National Company Law Tribunal (NCLT) for the demerger of its hotel business. This approval came from the Kolkata bench of the NCLT on Friday, as per an exchange filing.

The company announced plans to demerge its hotel business in August 2023 into a separate entity. Under this demerger scheme, ITC will maintain 40% ownership of ITC Hotels, with ITC shareholders acquiring the remaining 60% in proportion to their stake in the parent entity.

Investors have been eagerly awaiting the separation of ITC's hotels and FMCG segments for years. They have consistently pushed for the spin-off of profit-generating divisions like FMCG to unlock greater value.

While the management has hinted at such moves occasionally, concrete action has remained elusive.

The hotel business contributes just 2% to ITC's total revenue. Listing it separately could pave the way for the standalone FMCG segment to command higher valuations, benefiting shareholders. However, the ultimate value addition will depend on the specifics of the deal.

ITC's dominance in the Indian cigarette market remains unmatched, with over 75% market share by volume, contributing 35% to its total revenue in FY22.

The company's strategic diversification into non-tobacco sectors has been noteworthy. FMCG now accounts for 25% of revenues, agriculture 25%, paperboards, and packaging 12%, and hotels 2%.

Recent buzz suggests ITC's long-anticipated restructuring could be around the corner. With growing investor pressure and a focus on unlocking value, the demerger could finally see the light of day.

ITC Financial Snapshot (2020-24)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
Revenue Growth (%)	2.91%	-0.19%	20.53%	16.56%	1.02%
Operating Margin (%)	42.58%	36.96%	34.53%	36.17%	37.76%
Net Profit Margin (%)	30.34%	25.18%	23.78%	25.45%	27.01%
Return on Capital Employed(%)	32.33%	28.65%	33.87%	39.49%	37.88%
Return on Equity (%)	25.90%	21.96%	25.89%	30.07%	29.14%

Source: Equitymaster

The sales have grown at a 5-year CAGR of 7%, the net profit has grown at a CAGR 10.1%. The RoE and RoCE has also advanced, reporting a 5-year average of 26.3% and 34.3%, respectively. This performance has allowed the company to maintain a solid balance sheet without any debt.

To know more about the company, check out its financial factsheet and latest financial results.

#4 Kotak Mahindra

Fourth on our list is Kotak Mahindra.

Kotak Mahindra Bank is a leader in India's banking sector. But its diverse portfolio, spanning insurance, wealth management, and securities, might be limiting its true potential.

Each business operates under distinct market conditions, and combined, they face the "conglomerate discount," where the whole is often valued less than the sum of its parts.

A demerger could change that. Separating its units would allow each to pursue its own growth path, providing clarity and focused strategies. Kotak's core banking business, with its digital push and growing market share, could thrive as a standalone entity.

Similarly, subsidiaries like Kotak Life Insurance and Kotak Securities could scale independently, attracting investors focused on those specific sectors.

For shareholders, this could unlock significant value. The demerger would give each unit the flexibility to realize its full potential, while Kotak Bank would continue expanding its leadership in financial services.

Though the company has not made any official announcements, its recent moves-such as streamlining operations and bolstering capital adequacy-signal strong financial health, possibly supporting a future restructuring.

The sale of a stake in Kotak General Insurance further raises speculation that the company may be gearing up for a more extensive corporate reorganisation or demerger to optimize operations across its business segments.

Kotak Mahindra Financial Snapshot (2020-24)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
Net Profit Growth (%)	20.90%	15.10%	20.50%	23.90%	21.60%
Advances Growth (%)	2.60%	0.90%	20.70%	17.90%	19.80%
Deposits Growth (%)	15.80%	7.10%	11.20%	16.50%	23.30%
Return on Equity(%)	13.84%	13.12%	13.19%	14.19%	14.88%

Source: Equitymaster

Between 2020-2024, the advances and net profit reported a 5-year CAGR of 12% and grew at 19.2%, respectively. Its return on equity (RoE) has averaged 13.4% over the same period.

To know more about the company, check out its factsheet and latest quarterly results.

#5 Vedanta

Last on the list is Vedanta.

Vedanta is set to demerge into six distinct entities: Vedanta Aluminium, Vedanta Oil & Gas, Vedanta Power, Vedanta Steel & Ferrous Materials, Vedanta Base Metals, and Hindustan Zinc.

This ambitious restructuring plan, subject to approvals, is designed to create more focused companies, each with the flexibility to pursue their own growth strategies. The demerger is expected to be completed by financial year 2025.

The move is part of Vedanta's broader strategy to simplify its operations and unlock shareholder value. By spinning off its diverse business segments, the company aims to attract more targeted investments, especially from global investors, which could help address its substantial debt load.

With Vedanta's debt at Rs 434 billion (bn), the restructuring could be a step toward alleviating the financial burden that has long weighed on the company.

In July, Vedanta confirmed that it had received regulatory approvals from leading stock exchanges BSE and NSE for the demerger.

The company emphasised the move would result in sector-specific entities, better positioned to align with India's global leadership aspirations in critical minerals, energy security, renewables, and technology.

However, the demerger raises critical concerns. The company has yet to clarify how the debt will be allocated across the new entities, leaving investors uncertain about the potential risks.

Additionally, the absence of detailed valuations for each business segment creates ambiguity about the actual value the restructuring will unlock.

While demergers have the potential to create long-term value, the success of this move will depend on how well the individual entities are managed and the specific terms of the demerger.

Vedanta's management track record has been mixed, with past attempts at restructuring falling short and ongoing challenges with managing its debt.

Key red flags include the unclear allocation of debt and the company's history of complex, sometimes unsuccessful, strategic decisions.

Investors should proceed cautiously, weighing the potential for growth against the risks tied to Vedanta's leadership and the unclear details surrounding the demerger.

Vedanta Financial Snapshot (2020-24)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
Revenue Growth (%)	-9.51%	5.16%	48.00%	10.96%	-2.59%
Operating Margin (%)	27.47%	34.92%	35.73%	25.30%	26.26%
Net Profit Margin (%)	-5.62%	17.08%	17.86%	9.85%	5.24%
Return on Capital Employed(%)	-2.61%	17.91%	29.36%	21.29%	25.20%
Return on Equity (%)	-8.15%	25.81%	37.23%	27.76%	21.61%

Source: Equitymaster

Between 2020-2024, the company's revenue has grown at 8.3% whereas net profit has fallen. The 5-year average RoE and RoCE stand at 18.7% and 20.9%, respectively.

To know more about the company, check out its factsheet and latest quarterly results.

Conclusion

A demerger isn't a guaranteed route to quick profits.

While it often promises value unlocking, this isn't always the outcome, and predicting success in advance can be tricky. Even if the separated business holds significant value, management decisions, such as unfair share-swapping ratios, can impact minority shareholders adversely.

Additionally, factors like weak fundamentals of the demerged entities and promoter selling post-demerger can drag down share prices.

For instance, the Aarti Industries demerger didn't create much value, and the proposed Piramal Enterprises demerger hasn't sparked investor enthusiasm either.

The key takeaway? Research is essential. Evaluate the management's intentions and their track record with minority shareholders. Trustworthy management will uphold their responsibilities to all shareholders.

Lastly, keep an eye on operational performance, scalability, and strategic execution of the demerged entities. By staying informed, investors can navigate risks and potentially benefit from these structural changes.

Moreover, Investors should also consider corporate governance as one of the criteria for due diligence before considering an investment.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...