Tata Group on Wednesday announced that Tata Global Beverages (TGBL) will purchase the consumer business of Tata Chemicals (TCL) to form a new entity that will focus only on consumption business with revenue of Rs 9,099 crore.

TGBL will be renamed to Tata Consumer Products after the demerger where it's market capitalisation will be Rs 18,000 crore, as per the current market price of TGBL.

Tata Consumer Products include all of TCL's consumer products i.e. salt, spices, pulses, protein foods, snacks, natural sweeteners and detergents.

Tata Consumer Products Valuations Analysis

According to the company press release, the proposed full equity transaction will create a focused consumer products company with a combined turnover and EBITDA of Rs 9,099 crore and Rs 1,154 crore respectively, for the 12-month period ended March 31, 2019, on a proforma basis.

In terms of share ratio, the company will allocate 1.14 shares of TGBL for every 1 share of TCL. This means that each shareholder will get 114 shares of TGBL for every 100 shares of TCL.

As of March 2019 BSE data, TCL's total outstanding shares are at 25.47 crore. In that case, 1:14 share swap ratio will result in 29.04 crore new shares of TGBL will be issued to the shareholders of TCL. This means TGBL will dilute a 46 percent stake in total. At the current market price of TGBL, this values the consumer business of TCL at Rs 5,808 crore, at which it trades 18.5x FY19 EV/EBIT.

Management View

Speaking to CNBC-TV18, CEO of TGBL Ajoy Kumar Misra said the merger would put the company on an aggressive growth path, "With the two platforms coming together and the synergy in terms of distribution, R&D and innovation, and all the cost efficiencies that we will bring in, we will have a very aggressive growth path."

He further added, "2-3 percent synergy is our initial estimate of the combined India businesses. So, if I take my Tata Global Beverages’ India business and India business of the consumer products, it is roughly about Rs 5,000 crore. So, 2-3 percent of that is in the ballpark."

Brokerages' View

IIFL, in a research report, views the demerger of the consumer products segment as incrementally positive for TCL. Expect the demerger to make the under-valuation of the residual business more apparent (~6x EV/EBITDA). The brokerage also said that the management's openness to discuss further value-unlocking opportunities is an added bonus.

Meanwhile, JM Financial believes that the Tata Group has indeed been fair while drawing up the valuation framework for the merger of TCL's consumer business into TGBL.

"We see no earnings-accretion in our base case per se, the deal does lend some right to hope that TGBL's portfolio mix could perhaps happen one day get much better, " the brokerage added.

It said the merged entity would derive 60 percent plus of its revenue from India versus sub-50 percent for TGBL in its existing form, with a margin profile that could be 400 bps better than 11 percent clocked by TGBL on its own.