The stock of Greenply Industries fell 14 per cent on Wednesday, following the de-merger of its laminates business. Greenply’s main business, after this de-merger, will be plywoods and medium density fibre woods.

The de-merged entity will be named Greenlam Industries, with laminates, decorative veneers and compact laminates businesses under its ambit.

The existing shareholders of the company will get one share in Greenlam Industries for every share they hold in Greenply Industries. The new entity is likely to list by February next year.

A positive move

The laminates business constituted about 36 per cent of the company’s revenue and 34 per cent of its operating profits in 2013-14. The move to de-merge this business and list it separately is a positive move.

Laminates has been a more capital intensive business for the company, and hence return on investment for this division has been lower. By hiving it off into a separate entity, the company will be able to improve the returns on its core business. Also, as this business mainly serves markets outside India, it will help in planning resources.

Given that laminates business will have a valuation similar to that of the plywood business, one-for-one share in the new entity, is a fair deal.

The management has indicated that the earnings per share (EPS) of Greenply Industries, post the merger, will be about ₹40 in 2014-15. At 18 times (higher end of the last one year valuation band), the stock should trade at around ₹720. Greenlam Industries on the other hand is likely to trade (when listed) at about half this price.

The stock of Greenply Industries were trading down 14 per cent at ₹​948 on Wednesday.