The Aditya Birla Group has initiated a restructuring exercise for its cement business; it plans to demerge the cement business of Grasim and merge it in two phases with the Rs 6,383-crore UltraTech. The merger will create India’s biggest cement producer with a capacity of close to 50 million tonnes and a pan-India presence. Cement accounted for 63 per cent of Grasim’s revenues of Rs 18,400 crore last year and analysts estimate the combined entity should generate an operating profit of Rs 4,500-5,000 crore in 2009-10. At the end of the two-stage transaction, Grasim is expected to have a stake of 60 per cent in the new entity.
The size of the new company, in itself, would allow it to tap the capital market more effectively to be able to add capacity as also pursue acquisitions. The merger would, therefore, help the Aditya Birla Group gain market share quickly; the idea is to add 25 million tonnes to capacity over five years. Analysts point out that there would be scope to leverage the equity or even raise equity to fund acquisitions, whether in India or overseas.
A pure cement company, they point out, would command better valuations from investors, especially a company of such a large size. Moreover, with all of the group’s cement assets now housed in one company, concerns that one company would grow at the expense of the other are done away with. So far, it’s mainly the cash flows of Grasim’s VSF business that have funded the build out in cement but now the cement business can grow independently.
However, it’s possible the VSF cash flows may be used to fund the cement business because, after all, Grasim will hold around 60 per cent in the new entity. From an operational perspective though, little changes because the bulk of the output of the two companies was, in any case, being marketed under the UltraTech brand. Also, both businesses were functioning efficiently and it’s not that synergies between Grasim’s cement business and UltraTech weren’t being exploited; after all, they belonged to the same management. The restructuring exercise is timely as India’s competition laws are likely to become tougher in the days to come.