Analysis – Grasim Samruddhi Cement Restructuring

Grasim Industries announced a 3-step process for consolidating its cement business with its 55% owned cement subsidiary Ultratech, which will create India’s largest cement company with capacity of 49 mtpa (FY10E). As part of this consolidation, Grasim will:
1) transfer its cement division to Samruddhi Cement, a wholly owned subsidiary.
2) Issue shares of Samruddhi Cement to the shareholders of Grasim in the ratio of 1:1. This would reduce Grasim’s stake in Samruddhi from 100% to 65%, with the balance owned by Grasim shareholders. Management expects Samruddhi to be listed by 4QFY10.
3) Consolidate Samruddhi with Ultratech Cement, terms of which are not disclosed yet.

The cement company would potentially need investment of $3bn and capacity addition of 25mnT over next 3-5 years just to maintain its capacity share.

The final impact of the entire restructuring process on both Grasim and Ultratech will depend upon terms of the merger, which are yet to be announced.

Citigroup in a research note said,

While there is room for some upside assuming a re-rating for a larger size pure-play cement business, we maintain Sell on both Grasim and UltraTech, as we expect the impending oversupply to bring down cement
company valuations. From a market perspective, the consolidation level remains the same, as both companies were marketing cement together largely under the UltraTech brand name.