CLOSED STRATEGIES

Spin Off

Objective

The strategy seeks to generate superior risk adjusted returns relative to market indices by investing in stocks of companies undergoing a demerger. Typically, such an action by the company will help remove the holding company discount that the market attributes and thereby enhance the stock's valuation. Unifi's proposition is to gain from the information and fundamental asymmetry linked value-price mismatch, by closely tracking the entire Spin-Off process and investing in such companies after a detailed review of their fundamentals.

Investment Approach

As businesses enter different life cycles, the stakeholders realise that the manner in which they attract different capital, financial, return metrics and consequently very different investor interests. As a result, this leads to a vastly altered valuation proposition for the consolidated entity that holds the different lines of businesses. Understandably, one business is deemed to be far more valuable than the other. But the consolidated value of the business does not in its entirety capture the same as it has to account for the lower valued business. In other words, the sum of the parts is almost always lesser than that of the whole.

Corporate India has woken up to the fact that spinning off an unrelated business, or a business with a distinctly and vastly different growth profile is key to realizing the right value for the respective business, and is in the long term interest of its key stake holders. The Unifi Spin Off strategy seeks to identify such opportunities where the sum of the parts is greater than the whole and invest in such parts to unlock value that was hitherto lost in a conglomerate’s consolidated set of books.

Universe

Our universe is built from the Spin-offs approved by Boards of respective companies as filed with the stock exchanges. At any point in time, our portfolio may include 20% of companies that may not have publicly announced a demerger but we believe, through our primary research, are close to doing so. From the universe of such companies, we would select ideas to invest based on a bottom up approach that we have been practicing over the last twenty years.

Investment Risk

While various research reports support our inferences about the outperformance potential of Spin-offs, the skewed return performance of the stocks suggest that the portfolio will likely to have higher volatility in relation to broader markets. Since the Spin-off strategy is based on the hypothesis of identifying a stock valued at X, based on prevailing peer valuation of respective businesses, and buying it at or below 0.7X; it is fair to expect that a Spin-off portfolio will have lesser capital risk than broader markets, but that does not protect us from poor execution by management. Lack of sustained transaction flow is a possible risk.

Portfolio Structure

The portfolio is likely to have around 15-20 stocks in the PMS platform. The investor's assets will always remain in the investor's name with a SEBI registered custodian. While tracking and monitoring of investments will be active, there’s likely to be low turnover in the strategy.

Benchmark: S&P BSE 500 TRI