Aditya Birla Fashion Demerger: Stock crashes 66% as Madura demerger takes effect; What investors need to know

Aditya Birla Fashion and Retail Ltd (ABFRL) saw a spectacular 66 per cent drop in its share price on May 22 as the company carried out the much-awaited demerger of its Madura Fashion & Lifestyle (MFL) business into a separately listed company — Aditya Birla Lifestyle Brands Ltd (ABLBL). The stock fell to Rs 88.80 per piece intraday, from Wednesday's close of Rs 269.15, showing the impact of the demerger.

Why the stock declined more than 66%

The steep decline in ABFRL's share price was technical in origin, prompted by the valuation reset due to demerger. According to the scheme, every 1 equity share held in ABFRL will be exchanged for 1 equity share of ABLBL. Since the value of the spun-off business is now to be listed separately, the market price of ABFRL has correlated itself.

This is a date-driven fall in this record, and not an indication of business performance. The correction in price reflects the value in the businesses that ABLBL now owns, such as premium brands like Louis Philippe, Van Heusen, Allen Solly, Peter England, and Reebok.

What does the demerger signify for ABFRL?

The action is intended to release value by demerging the high-growth lifestyle and innerwear business under ABLBL from the ethnic and digital-first business of ABFRL. After the demerger, Rs 1,000 crore of the Rs 3,000 crore debt of ABFRL will be shifted to ABLBL, enabling cleansing of balance sheets for both the companies.

ABFRL will also raise Rs 2,500 crore within the next 12 months, backed by promoters, for future growth. The new structure will give each company independent capital paradigms and allow for more pointed strategic direction.

What must investors do now?

Market analysts recommend not panicking at the sharp fall. "This is a mechanical fall because of the split and not because there is a weakening of fundamentals. Shareholders will finally have two standalone entities, each with their own growth potential," explained a Mumbai fund manager.

Both ABFRL and ABLBL will be listed separately on NSE and BSE, providing investors with ease of maneuver and transparency in valuations. Investors can consider holding on to their positions until both shares start trading prominently and valuations settle. 

Approved through NCLT scheme, the demerger is a part of the continuous restructuring of the Aditya Birla Group in simplifying operations and building focused retail giants under one roof.