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Grasim: De-merges cement business - Views on News from Equitymaster

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Grasim: De-merges cement business
Oct 5, 2009

L&T sold its residual stake in UltraTech during the middle of 2009. Following the exit of L&T, the speculation that there will be a consolidation of cement assets of the Aditya Birla group (Grasim and UltraTech) was gaining a lot of ground. The speculation has finally turned into a reality. Last Saturday, Grasim unveiled plans to de-merge its cement business. Grasim's cement-related assets will be transferred to a wholly owned subsidiary-Samruddhi Cement Ltd. Samruddhi Cement will issue one equity share of Rs 5 face value each credited as fully paid up to the shareholders of Grasim for every equity share they hold in Grasim.

The company did not de-merge the cement business into an independent company as that would have led to loss of Grasim's strategic interest. The option to transfer cement assets to Samruddhi Cement and then consolidating group cement business, UltraTech, retains economic interest of the shareholders and Grasim's strategic interest.

Let's find out how.

Take a look at the following chart.

Grasim demerger

Source: Company Presentation

Grasim shareholders directly owned 100% of cement assets under Grasim Industries. Upon transfer of cement assets to Samruddhi Cement, Grasim Industries would continue to hold 100% cement assets. However, the company has diluted 35% holding in Samruddhi Cement to Grasim shareholders by issuing one equity share of Rs 5 each for every equity share they hold in Grasim. Now, what has happened is Grasim shareholders directly hold 35% in Samruddhi Cement and hold the remaining 65% indirectly (Grasim investments in Samruddhi Cement). Thus, they still continue to hold 100% of cement assets, which were earlier part of Grasim Industries.

Thus, the economic interest of Grasim shareholders is unaltered. However, what remains to be seen is the deal that would lead to consolidation of cement assets under UltraTech and that of Samruddhi Cement.

Our view:
Grasim has merely transferred its cement assets to a wholly owned subsidiary - Samruddhi Cement. Upon completion of the proposed demerger, Grasim would continue to hold 65% stake in Samruddhi Cement. Talking about valuations, from the shareholders' perspective there has not been a very significant change and no loss of economic interest (as explained above). Despite today's correction in the stock price, we believe that the stock of Grasim is fairly valued at the current juncture.

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