Solvika Chemicals has a specialty segment with EBITDA of Rs 300 crore and a commodity segment with EBITDA of Rs 200 crore. Peers trade at 18x and 6x respectively. Net debt is Rs 1,200 crore, there are 50 crore shares and the stock is Rs 85. Build the sum of the parts and say what closes the gap.

The parts are worth about Rs 108 a share, or about Rs 100 once head office costs are valued, against a price of Rs 85: a discount of 15% to 21%. The market is paying about 15.5x for the specialty business against 18x for its peers. A discount like this rarely closes by itself; it needs a catalyst such as a demerger, a sale of the commodity unit or clear evidence that cash from specialty will stop funding commodity capex.

A family that owns a busy restaurant and a struggling petrol pump would not value the pair at one blended multiple; a buyer would pay a restaurant price for one and a pump price for the other. A sum of the partsA valuation that prices each business of a group separately, usually at the multiples its own peers trade on, then adds them and subtracts the group’s net debt. values each segment at the multiple its own peers command, adds them, and subtracts the group's net debt. Specialty at 18x Rs 300 crore is Rs 5,400 crore; commodity at 6x Rs 200 crore is Rs 1,200 crore. Together Rs 6,600 crore, less Rs 1,200 crore of debt, leaves Rs 5,400 crore of equity, Rs 108 a share.

Head office. The Rs 40 crore of unallocated costs is real cash that neither segment carries in its EBITDA, and a buyer of either piece would not take it on, but the group pays it every year. Valued at a blended 10x, head office costs are worth minus Rs 400 crore, Rs 8 a share, which takes the sum of the parts to about Rs 100. Leaving this line out is the most common way a sum of the parts flatters a conglomerate.

Work out what the price implies. At Rs 85, Solvika's enterprise value is Rs 5,450 crore, 10.9x total EBITDA. Take out the commodity arm at 6x and add back the head office cost, and the market is paying about 15.5x for the specialty business, against 18x for pure specialty peers. There are reasons that can be fair. Cash from specialty may be funding capital spending in the commodity arm; the specialty business may be smaller or slower growing than the peers setting the 18x; and a separation can carry tax and stamp duty costs. Test the peer set before calling the discount a mistake: at 15x for specialty the parts are worth only about Rs 82 a share, below the price.

A discount can last for years, so the pitch needs a catalyst with a date. A demerger that lists the specialty business separately, a sale of the commodity unit, or a public commitment to stop funding commodity capex from specialty cash are the events that make the market price the parts instead of the whole. Management's review of the group structure is the hook here: the case is stronger if the review has a stated deadline, or if the board has a record of doing what it says. Without one, a cheap sum of the parts is an observation, not a trade.