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Emkay Global
GHCL (Buy)
CMP: ₹96.6
Target: ₹169
The demerger of the textile business would be a major decision for the company as the business has been under stress for some time, remaining a headwind on overall company performance. The soda ash business remains a strong cash generator for GHCL.
GHCL (formerly Gujarat Heavy Chemicals Ltd) has proposed to demerge its Textile business and create a wholly owned subsidiary, which will be incorporated in due course post regulatory approvals. The share exchange ratio would be one equity (FV ₹2) each for every one share (face value ₹10) held.
Management sees value unlocking in both the businesses given their different business dynamics and risk/return profiles. It remains positive on the long-term outlook of the Soda ash business, and currently does not see any major impact on demand due to Covid-19.
We believe the demerger would create value for the shareholders given the strong long-term outlook of the soda ash business. In the backdrop of the heavy sell-off in the market due to Covid-19 issues, the stock is currently available at a four-year low multiple of 2.5x P/E which looks attractive.
We reiterate ‘buy’ with a target price of ₹169 (3x FY22E EV/EBITDA).
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