Grasim Industries, an Aditya Birla group company, took another step towards consolidating its cement business by deciding to demerge it into its wholly-owned subsidiary Samruddhi Cements.

Demerger design

Under the proposed demerger, the company will transfer its cement and related business, except its investments in UltraTech Cement, to Samruddhi Cements. In return, Grasim’s shareholders will receive one equity share of Samruddhi for each share of Grasim Industries they hold. After this share transfer, shareholders of Grasim Industries will hold 35 per cent of total equity in Samruddhi Cements while the rest will be controlled by Grasim Industries. Samruddhi Cements will be listed after this merger.

Objective

The demerger is expected to accomplish many objectives. After the demerger, shareholders can take direct exposure to the cement sector by holding shares of Samruddhi Cements. At present, shareholders of Grasim Industries have exposure in textile and chemicals business too, which forms around 30 per cent of the company’s revenue.

Most importantly, the merger with Samruddhi Cements is expected to create a platform for further merger of Grasim’s cement business under Samruddhi Cement into UltraTech Cement. In 2004, Grasim had acquired majority stake in UltraTech Cement by buying engineering giant Larsen & Toubro’s holding in it.

Shareholder impact

The shareholders do not seem to have welcomed this move. In a week of the announcement on 3 October 2009, Grasim’s share price dropped 11.70 per cent from Rs 2,650 to Rs 2,399.

Says a research report by financial services firm Angel Broking: “Currently, since both Grasim and UltraTech are operating at optimum levels, we do not see any significant value accretion out of the deal.”

Grasim’s share price will also be impacted by other concerns surrounding the cement sector. A large capacity expansion by cement companies in future could create oversupply which would put downward pressure on cement prices and the profit margins of the cement companies may drop.