>Kirloskar Oil Engines Ltd (RELIANCE MONEY)

Demerger of engines and auto component business from the Company
Kirloskar Oil Engines Ltd (KOEL) has announced the demerger of Engine and Auto Component business of the Company into Kirloskar Engines India Ltd (KEIL). After the demerger KOEL would continue to hold investments in its books while KEIL would represent core engines and auto component business. KOEL after Q3FY09 results informed that it’s Board of Directors had constituted a Committee of Independent Directors to examine merits of reorganizing the various businesses and investments of the company, including by way of restructuring and /or demerger of the Company. The effective date of demerger has been decided as 1st April 2009.

Existing shareholders to get 3 shares of KEIL for 4 shares in KOEL
KOEL has fixed demerger ratio at 3:4 which means existing shareholders of KOEL to get 3 shares of KEIL for every 4 shares held in KOEL. The company has not disclosed the method of valuation for demerger. But we believe it to be mainly based on book value and potential value of unlisted investments. We believe the valuation has given due consideration to potential of unlisted companies (Toyota Kirloskar, Toyota Kirloskar Auto Parts, T G Kirloskar Automotive etc) which is reflected in demerger ratio.

KEIL ‘s equity capital after the demerger would be ~146mn equity shares of Rs.2 each (~Rs.291mn). KOEL as on 31st March 2008 held book value investments of ~Rs.4.76bn which includes strategic investments and investments in mutual funds. The current market value of these investments is ~Rs.1.9bn and including the book value investments of non-quoted investments and mutual fund investments, the investment on the books are at Rs.4.93bn.

KOEL’s valuation has not been reflecting the value of investments it holds in the balance sheet and because of which we believe the company has taken the decision to demerge core business into separate company, KEIL.

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