Grasim Industries has announced plans to demerge its cement division (25.6mt capacity) into a separate company called Samruddhi Cement. The appointed date of merger will be 1 October. Samruddhi will eventually be merged into UltraTech Cement post listing. This move is likely to have a marginal tax impact of Rs120 crore– 140 crore on Grasim in terms of stamp duty.
Through this demerger process, Grasim intends to create a pure play cement company. The move is likely to offer greater access to capital for capacity expansion and inorganic acquisitions. Further, the group shall have a single cement company with a pan-India presence, functioning under one brand.
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However, we see no benefits in terms of operating efficiencies as both companies were already integrated operationally and were selling under one brand, i.e., UltraTech Cement.
As per the scheme of merger, Grasim shareholders will receive one equity share of Rs5 each in Samruddhi for each share held in Grasim. This will give Grasim a 65% stake in Samruddhi and Grasim shareholders a 35% stake. The desired next step will be to merge Samruddhi with UltraTech, giving Grasim a 55–65% stake in the merged entity.
Grasim’s cement business has been funded by the VSF division over the last few years. With the proposed demerger, Grasim will now be left only with its VSF business and a liquid investment in cement. From an investor’s perspective, we believe greater benefits would be derived from investing in the subsidiary than in Grasim, as the latter shall attract a holding company discount.
Outlook and valuation
We have assumed a share swap ratio of 1:2 for the UltraTech–Samruddhi merger and EV/Tonne of $ 110, which will lead to a 12% stock price upside for UltraTech. So far, the company has been trading at a discount of 20–25% to ACC and Ambuja Cement. We believe the proposed merger would narrow UltraTech’s valuation discount to larger players, since it would give the company a pan-India presence as opposed to its current footprint in the capacity-heavy southern and western markets.
Since Grasim would continue to hold an economic interest in the cement business, the only impact on its valuation would arise from the imposition of a holding company discount.
We have assigned a 15% discount to our cement valuation while keeping the other business valuations intact. This gives us an SOTP target price of Rs2,546 from our earlier target of Rs 2,777. We maintain a Hold rating on Grasim.