Grasim shares sink on cement spin-off

Grasim shares sink on cement spin-off

Mumbai: Grasim Industries Ltd’s shares fell sharply on the first trading day after announcing that it would spin off its cement unit, and analysts cut price targets, citing a holding company discount.

The stock ended the day at at Rs2,509.10, down 7.1% from the previous close, after dropping 7.6% intraday. UltraTech Cement Ltd, the Grasim arm that will eventually be home to the cement business, fell 5.19% to Rs804.85 as the market remained bearish on cement due to oversupply concerns.

The Sensex declined 1.6% on Monday to close at 16,866.41 as investors decided to book profits before September quarter earnings are announced.

After the spin off, Grasim will become a holding firm with its business activity confined to viscose staple fibre (VSF). While the restructuring won’t impact earnings at a consolidated level, investors may choose to buy just the cement unit’s stock.

“Going forward, how the cash from VSF would be used would be a driver for Grasim’s investment case, given that its cement holdings would likely attract a holding company discount," wrote Pinakin Parekh and Neha Manpuria, analysts with the local securities arm of JPMorgan Chase and Co. “Investors, in our view, would prefer to play the cement story via the subsidiary itself."

The only upside for Grasim could be because of the two-step demerger process the company has announced.

On Saturday, the flagship of the Aditya Birla Group said the cement division would be spun off to an investment firm arm Samruddhi Cement Ltd, which would be listed. Grasim will own 65% in Samruddhi and its shareholders the rest. Once listed, Samruddhi will be merged with UltraTech, at a share swap ratio that is yet to be disclosed.

“There could be some relative upside for Grasim shareholders in case the transaction takes place at a higher valuation, given Samruddhi’s larger size, better market mix and profitable white cement business," wrote Pradeep Mahtani and Rashee Chopra of Citigroup Global Markets Inc.

By going through the subsidiary route, the company has saved a large tax bill. “There won’t be a large cost to the consolidation because there is no capital gains tax; there will be Rs100-120 crore of stamp duty, that’s it," said Gaurav Dua of brokerage Sharekhan Ltd.

An adverse swap ratio for UltraTech might pare gains, even if it’s largely expected to outperform Grasim.

“Post the merger with Samruddhi Cement, UltraTech would then enjoy similar valuations like the other cement players such as ACC (Ltd) and ACEM (Ambuja Cements Ltd) as against a discount currently, since it would become the largest player in the cement industry," said a note from Teena Virmani of Kotak Securities Ltd. “We expect UltraTech to be valued at 6x EV/Ebitda for its against our earlier valuation based on 5x EV/Ebitda on FY10 estimates."

EV refers to enterprise value and Ebitda to earnings before interest, taxes, depreciation and amortization.