Mumbai: The board of Grasim Industries Ltd, the flagship of the Aditya Birla Group, meets on Saturday to discuss hiving off its cement division and then merging it with subsidiary UltraTech Ltd, resulting in the creation of India’s largest cement maker. In an interview, Ajay Parmar, head of research at Emkay Share and Stock Brokers Ltd, talks about the impact of this deal. Edited excerpts:
What do you think are the triggers that are pushing Grasim towards this restructuring?
Basically it’s the rationalization of the same business in two companies. Now, UltraTech will have the entire combined cement business and will become the largest cement manufacturer in India. With this capacity, UltraTech will enjoy economies of scale. If you look at it from the investor’s point of view, UltraTech becomes a better choice. It will be a plain-vanilla, single business and one company. There will be a lot of interest in this company because it will enjoy a leadership premium.
What will happen to Grasim?
Grasim will become a holding company plus it will have other businesses such as VSF (viscose staple fibre), chemicals, etc. For Grasim, nothing has changed much. It has a 55% holding (in UltraTech). Post merger it will have more than 75%. As for earnings, UltraTech’s were consolidated into Grasim. It will continue to reflect in Grasim’s earnings.
What is the best way to get this transaction done? How will it affect shareholders?
The decision is going to be revealed (on Saturday). I also think that this (merger) won’t trigger the takeover code since it’s not a slump sale. They are going to spin it off and then merge. Anything that can save capital gains tax would benefit both the company and shareholders.
My belief is that investors will start shifting from Grasim to UltraTech because the latter gives them a direct investment opportunity in the Indian cement industry and in the largest company. UltraTech will outperform while Grasim will gradually underperform.
Will this trigger a round of consolidation in the industry?
If you consider the post-merger numbers of UltraTech, it will be able to generate at least Rs4,000 crore of cash. Without taking any debt, with that money, you will be able to add another 7 million tonnes of capacity, which you either buy out or construct. Now, larger companies would typically be interested in buying out smaller companies to maintain their market share and there would be consolidation.
How can cement companies protect their margins when everyone is expanding capacity?
In the last two-three quarters, cement companies benefited from the lower cost of raw materials. That is a seasonal thing. On a macro level, there will have to be more rationalizing (of) the cost structure, and introduction of superior marketing strategies.
Looking at the overcapacity problem in another way, we are all projecting a 7% growth for cement sales based on GDP (gross domestic product) growth. If economic growth improves and the government executes its plan on infrastructure, this overcapacity situation may not last at all.