Short Grasim, Long UltraTech. That’s the call the markets have taken in each of the past three trading sessions. So while Grasim Industries Ltd shares have fallen by 5.1% in these three sessions, those of UltraTech Cement Ltd have risen by 13%. News of Grasim’s move to hive off its cement business and then merging it with UltraTech evidently reached the markets before the first news reports went to print.

But why is this news being taken negatively by Grasim’s shareholders and positively by UltraTech’s, when details of valuations and the merger ratio are still not known? The reasoning is simple. Post restructuring, UltraTech will transform into the country’s largest cement company with a capacity of 49 million tonnes and will be the only one with a pan-India presence. Currently, ACC Ltd has a wide reach but is not present is some key states such as Gujarat and Andhra Pradesh. UltraTech, post-merger, is therefore likely to be re-rated as a stock, and may even be the preferred stock to play in the Indian cement sector because of its pan-India presence.

Graphics: Sandeep Bhatnagar / Mint

In Grasim’s case, stand-alone revenues will fall substantially since the cement business accounted for 63% of revenues in fiscal year 2008-09. In terms of economic interest, however, nothing will change for Grasim shareholders. They will continue to have the same exposure to the cement sector through their shareholding in UltraTech.

Currently, Grasim’s shareholders have a 54.78% share in UltraTech’s FY09 operating profit of Rs1,820 crore (Rs 997 crore). Besides, Grasim’s stand-alone cement business made an operating profit of Rs1,912 crore last fiscal, putting their total economic interest in the cement businesses of both companies at Rs2,909 crore.

Now, according to an analyst with an institutional broker, in exchange for Grasim’s cement business, UltraTech is likely to issue 1.35 new shares for every share held by Grasim’s shareholders. Because of this equity dilution, Grasim’s stake in UltraTech will fall to around 27.47%. But since each Grasim shareholder will be issued fresh UltraTech shares, Grasim’s existing shareholders will end up with a 49.85% direct stake in the company (assuming it’s in the 1.35:1 ratio).

Their total stake (direct and indirect) will stand at 77.32%, and post-merger the combined operating profit will stand at Rs3,732 crore (using FY09 results), giving them an economic interest of around Rs2,886 crore, or close to what they enjoy currently.

Since Grasim’s exposure to the cement sector will be in the form of a holding company, investors may prefer to have a direct holding through UltraTech, and this would be the reason for the sudden preference for the latter’s shares.

— Mobis Philipose

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