Grasim Industries announced on Thursday that its board would meet on Saturday to discuss its restructuring plans. News reports suggest the company would restructure its cement operations.
According to analysts, Grasim would either spin off its cement operations to its subsidiary Ultratech Cement and create a new entity or merge Ultratech with itself by issuing shares to Ultratech’s shareholders. It is more likely the company would create a separate cement entity.
At any rate, getting the cement business together would be a positive move as it would enhance the company’s focus on the cement business. Grasim holds a 50.7% stake in Ultratech and thus, the company’s consolidated financials would be impacted to that extent.
Cement accounts for a huge portion of Grasim’s standalone financials, too. In the June quarter, the cement business accounted for about 70% of its standalone revenues and four-fifth of its earnings before interest and tax.
Grasim’s other businesses have not been doing well. In the June quarter, a fourth of its standalone revenues came from the viscose staple fibre business, which has been bogged with poor demand for over a year now. Chemicals and textiles business brought in the rest. The chemicals business was hit by a steep fall in prices of chlorine and hydrochloric acid.
With so much riding on cement, a demerger of the business would mean a substantial erosion of profits for Grasim in future. Resultantly, the company’s stock too would lose a lot of value.
Ultratech’s stock, however, benefits from the resulting scale. The merger would create the largest cement entity in India with a capacity of almost 42 million tonnes a year. An anticipated excess supply in the cement industry is expected to put pressure on cement prices in the second half of this fiscal. The economies of scale thus augur well.
Also, Grasim would have to shell out a substantial amount in stamp duty payments.
Grasim’s stock has underperformed the broader markets in the past week and declined 4.7% to Rs 2700.80 as against a 2.6% increase in the BSE Sensex. On the other hand, Ultratech has moved up 13% to Rs 848.90 last week. Perhaps the market had an inkling of the company’s plans.
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