Shobhana Subramanian / Mumbai Oct 06, 2009, 00:37 IST
Shareholders may prefer a direct exposure to the cement business through the new entity.
Grasim has underperformed Ultratech in the last few trading sessions with the stock coming off by 7 per cent on Monday. That’s because although Grasim’s shareholders will continue to have an exposure to the country’s biggest cement firm, once the demerger of the cement business goes through, it will be an indirect play for which the market is pricing in a discount.
Of course, the VSF business will cushion Grasim’s earnings against the cyclical cement business but cash flows from VSF, which have so far been used to fund the cement build out, need to be used efficiently. So far, minority shareholders of Grasim haven’t seen any change in their economic interest because they will receive one share of Samruddhi (the subsidiary into which the cement business of Grasim is being demerged) for one share of Grasim. In the medium term, the value of their cement stake will be clear since Samruddhi will be listed. But ultimately, it’s the valuation at which the merger with Ultratech takes place, that’s important; Citigroup points out that both Ultratech and Samruddhi are trading at September 2010 EV/tonne (enterprise value/tonne) of close to $100 a tonne and if the merger takes place at this valuation, the impact on share prices will be marginal. It’s possible the ratio will favour Grasim shareholders because Grasim’s capacity is bigger at 26 millions tonnes compared with Ultratech’s 23 million tonnes and it also has a profitable white cement business.
Shareholders, though, may prefer a pure cement play now that the Aditya Birla group’s entire cement business will be housed in one entity and concerns, that one company would grow at the expense of the other, are done away with. The merger won’t really result in any significant cost savings since both businesses belonged to the same management and were operating efficiently. Besides, most of the output was being sold under the Ultratech brand. A bigger balance sheet would allow for faster growth both through the organic and inorganic routes.
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Grasim has underperformed Ultratech in the last few trading sessions with the stock coming off by 7 per cent on Monday. That’s because although Grasim’s shareholders will continue to have an exposure to the country’s biggest cement firm, once the demerger of the cement business goes through, it will be an indirect play for which the market is pricing in a discount.
