Consider these aspects. While both Birla Copper and Sterlite Industries have an identical smelting capacity, the capital costs for Birla Copper are double that of Sterlite Industries'. Though it is largely believed that Birla Copper's plant is technologically superior and its expansion cost willbe far lower, higher capital costs will mean a lower return on capital employed. Sterlite Industries has the advantage of a cheaper second-hand plant, and does not have the need to put up a captive jetty and a power plant.

To be competitive, it is important for Birla Copper to prune its capital costs. Hiving off its Rs 250-crore jetty will achieve that. Besides, though the existing legal framework does not specifically provide for a jetty to be considered as an infrastructure project, as a separate entity, it would stand a better chance of being accorded the status. If that happens, the shareholders of Indo Gulf Corporation will stand to benefit further (to the extent of the company's stake in the new entity) as infrastructure projects enjoy a number of tax-breaks.

Now that the company has demonstrated that it has no qualms about spinning off parts of itself to create shareholder value, it is high time that it began to seriously consider hiving off Birla Copper. As the management has little experience inthis line of business, it could invite an established international player to take a stake in this entity. Having an established partner will help it procure raw material from international markets at the most competitive rates. Besides, it will also be able to take advantage of the partner's international presence to export the finished products. The actual running of the plant can be managed by the Birlas, who have proved to be highly cost efficient in operating large commodity-based businesses.

Hiving off the copper division will once again make Indo Gulf Corporation a focused company, and its discounting on the markets will change accordingly. A number of FIIs have had reservations about investing in Indo-Gulf's shares because of its unrelated diversification. The company even had plans to diversify into paper and caustic soda, which were dropped after the company's studies found these businesses unsuitable. It, however, stuck to its decision to enter into copper smelting, and the results so far do notappear to be too encouraging. Copper being a low margin business has had an adverse effect on the margins of the company as a whole. In the first half of the current year, its operating margins slipped from over 25 per cent to below 20 per cent. Yet, it is also true that the company's urea business began to stagnating, and it needed to look at new avenues for growth.

But diversification can also be achieved by the shareholder himself through portfolio investments, and greater shareholder value could have been created by returning the excess funds to him. Now that the company has already made its investments in the copper project, by hiving off the division, it could perhaps create even better value for its shareholders. The hive-off will mean that shareholders who hold Indo Gulf Corporation's shares alone will be alloted the new entity's shares in the same proportion as their current holdings in the company.

Thus, they will have the choice to quit from the copper business if they so wish, at the same timeretaining their stake in the urea business. Besides, after the company has reaped tax benefits due to the new project, it will hardly make any difference to overall profitability whether Birla Copper is a division or a separate entity. The added shareholder value far outweigh the costs involved in the exercise.