Analysis: Ultratech - Grasim subsidiary merger ratio at 4:7

Ultratech Cements will merge Grasim's subsidiary Samruddhi Cements into itself. The merger ratio has been announced. It is 4:7. Grasim hived off its cement business to Samruddhi Cements, its subsidiary. For each share held of Grasim, the shareholders will get an extra share having face value of Rs. 5- of Samruddhi, and for 7 such shares, the share holders will receive 4 shares of Ultratech. Ultratech's share capital will increase by Rs. 15 cr approx.

Let's do some number crunching, shall we? Currently, if you hold 105 shares of Grasim (105 because it would be easier to calculate), your effective Gross Cement EPS (Revenue per share for cement) will be calculated at Rs. 65,089 considering Grasim's cement revenues at Rs. 4220 and Ultratech's at Rs. 3598 and Grasim's 55% share in it. (44310 + 20779=65089)

After the merger, your Gross Cement EPS would be at Rs. 66373.1. We have considered Grasim's holding to increase in Ultratech to around 60.5% post merger. In both cases, Grasim's cement revenues have been used as Rs. 4220 cr and Ultratech's as Rs. 3598 cr.

Now operational costs may not go down significantly, but they will certainly go down- we are not considering the uncontrollable factors such as fuel costs. This would lead to an increase in margins. The combined entity would become the largest cement maker in India with current capacities of 42 mtpa, which would be upgraded to 49 mtpa according to the company's plans.

Next comes the impact on the share price of Grasim. The initial news of the restructuring was not acceptable to the market. The stock declined from year highs of 2900 to sub 2200 levels. Grasim's cement share per se would go down to Rs. 4690.8 cr (using the same data) from Rs. 6199 cr. Much cannot be said about the arbitrage moves in the market till the next announcement of the record date comes- since besides being in a bear grip due to the holding company discount, Grasim's shareholders would benefit greatly by this move once they've been allotted shares of Ultratech. So, it would not be surprising to see Grasim's stock price move up the next week. In general, the cement outlook has not been predicted to be very very good, with cement stocks taking a beating in the past few months.

So, what would be left with Grasim? Its VSF and Chemicals business. Grasim is the largest producer of VSF in the world, however, the contribution of the VSF segment (about 30%) to its business has been overshadowed outright by its cement business. Grasim has chalked out some Rs. 1000 cr for setting up a new VSF plant in Gujarat, to increase the capacity by 25%. According to the company, the current restructuring would unleash share value and also would not disallow Grasim from nurturing the cement business. Grasim, per se, would see an increase in margins after the restructuring given its good margins in VSF.

StocksCenter verdict:

In the long run, this is tremendous value creation for the current Grasim shareholders. If prices dip, consider buying this stock before the record date!