Grasim to shift cement assets to subsidiary

Grasim Industries of the Aditya Birla Group will merge its cement businesses with its subsidiary, UltraTech, to create the country’s largest standalone cement company. As a first step, Grasim today said that it will demerge its cement business and transfer it to a new subsidiary called Samruddhi Cement. In the next stage, Samruddhi will be merged with UltraTech.

The combined entity will have a cumulative production capability of 46 million tonnes, which is more than double of closest competitor ACC’s 22.6 million tonne. At present, Grasim has an annual production capacity of 23 million tonne, while UltraTech’s annual capacity is 23.1 million tonnes. Another three million tonnes is expected to be added by the end of December.

Under the demerger scheme announced today, Grasim shareholders will get one Samruddhi share, with a face value Rs 5, for every five Grasim shares held by them. Grasim shareholders will directly hold a 35 per cent stake in Samruddhi, while Grasim's stake will be 65 per cent.

The demerger process is expected to be completed by March, after which Samruddhi will get listed on the stock market. This will be followed by a merger with UltraTech, where Grasim holds 55 per cent at present. Once this merger takes place, Grasim's stake in the merged entity will be between 55 per cent and 65 per cent.

Grasim Chief Financial Officer Adesh Gupta said that the UltraTech-Samruddhi merger could take between eight and 10 months for completion.

Analysts said that a two-stage consolidation process would help Grasim avoid payment of capital gains tax. The merger was being undertaken to improve valuations for the Birla group’s cement business, said Gupta. “The demerger opens up new choices for financing growth in the cement business, in addition to the continued parentage of Grasim,” he added.

Gupta said that over the next five years, the Aditya Birla Group will need to add 25 million tonne to its existing capacity to retain its market share in the cement business at 19 per cent. This will require an additional investment of Rs 15,000 crore.

At present, cement capacity in India is estimated at 227 million tonne and is projected to rise to 245 million tonne by March 2010. “If required, we can go and raise money from the markets also,” said Gupta. At present, Samruddhi has a three-member board including Gupta and UltraTech CEO Saurabh Mishra.

“The restructuring move is designed to ensure Grasim’s majority stake in the rapidly growing cement business. It will also provide Grasim shareholders direct participation in a pure cement company,” Aditya Birla Group Chairman Kumar Mangalam Birla said in a statement.

DSP Merrill Lynch and Enam Securities are the advisors to Grasim on the restructuring process.