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The cement business accounts for 70 per cent of Grasim’s overall numbers.

BL Research Bureau

The Grasim Industries stock has declined by about 5 per cent over the past week on investor fears that its lucrative cement business, accounting for close to 70 per cent of its revenues and profits, would be hived off to UltraTech Cement.

Given that the company’s remaining businesses — Viscose Staple Fibre and Sponge Iron — are none too attractive, the key worry for investors was about how they would be compensated for the loss of the cement business.

The actual structuring of the cement business de-merger, announced on Saturday, does much to allay such fears.

The market expected either a sale of Grasim’s cement business to UltraTech Cement in exchange for shares in the latter; or a direct issue of shares to Grasim shareholders in return for this buyout. Either scenario would have dented the value of Grasim shares immediately on the deal taking effect.

In fact, with investors in Grasim set to receive one share each in the de-merged entity, as well as an indirect stake in the new cement subsidiary through the parent, the valuation for the Grasim stock may remain largely unaltered. The exact financials of the business to be de-merged are not known at this juncture. However, according to the standalone segment results disclosed in Grasim’s latest annual report, the cement business reported an operating profit of Rs 1,912 crore on revenues of Rs 6,995 crore in 2008-09, accounting for 70 per cent each of Grasim’s overall numbers.

A back-of-the-envelope calculation of the book value of the two entities post-demerger based on their segment capital details (standalone) for 2008-09, suggests that the new cement subsidiary, Samruddhi Cement’s book value may work out to about Rs 250 a share, while Grasim’s book value for its core business alone after demerger may work out to about Rs 300 a share.

In addition, Grasim’s stock will have to include a value for its 65 per cent holding in the new cement subsidiary (estimated Rs.780 per share). A big “kicker” for valuations also comes from Grasim’s assets and stakes in group entities such as UltraTech Cement, Idea Cellular, Hindalco and so on. Clearly, for investors in the Grasim stock, it is subsidiaries which will become much more valuable than the core business!

The Grasim stock may be protected from further battering next week given that the market expected the deal structure to be adverse to Grasim’s existing shareholders.

However, the actual payoffs from this deal for Grasim investors will be known only when the cement subsidiary manages to unlock value through a stock market listing or a sale to UltraTech Cement. This process is expected to take 8-10 months.

More Stories on : Cement | Restructuring | Mergers & Acquisitions | Grasim Industries Ltd

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