Homestretch to merger

Grasim is well-placed to push for a merger. It is just a question of `when' and not `if'. Grasim is likely to wait for a year or two to whip UltraTech's operations and financials into a better shape before going through with the merger process. The synergistic benefits from a 32-million-tonne capacity are, however, likely to be derived, even if they operate as separate entities.

The focus is likely to be on reducing the debt burden of UltraTech. There has been a reduction in its interest outgo over the past two years. Grasim has an impressive track record in pursuing business growth through debt and internal accruals, and keeping a tight leash on interest costs. As a result, the debt-reduction process is likely to be compressed into a shorter period than would be the case, given the size of the burden and the cash flows of UltraTech.

UltraTech should also be able to source funds at finer rates, as it now has the benefit of Grasim's standing in the debt market. This too is likely to improve the earnings stream. The merger process may also be held back till the operating margins expand by a few percentage points to narrow the divergence with those of Grasim.

Risk that may pay-off

The merger is likely to be on terms that safeguard the interests of Grasim shareholders. The risk of an unfavourable swap ratio exists. This is a risk that would, however, be worth taking, as gains subsequent to a merger are likely to prove rewarding. As the merger could be structured to issue shares only to shareholders other than Grasim, the equity expansion would be a positive from a valuation perspective.

The process may also involve a restructuring that could bring the fabric and garments business of Grasim and Indian Rayon as a separate and focussed entity with a distinct retail tilt. The combined cement entity may, however, still hold the viscose staple fibre business — Grasim has a monopoly and is one of the lower cost producers in the world — as it could provide a steady source of cash and offer stability to the earnings stream.

Grasim is also well-placed to pursue growth in cement through acquisitions and the greenfield route, once it cuts UltraTech's debt burden to a comfortable level. This is yet another reason why shareholders ought to hold their exposures in the UltraTech stock.

The risk to our recommendation are: A swap ratio that turns out to be loaded only in favour of Grasim and a delay beyond two years in the emergence of a finer balance between demand and supply of cement across various regions.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page