>GRASIM INDUSTRIES - ULTRATECH CEMENT MERGER UPDATE

Grasim/ UltraTech: Merger ratio of 0.57x; Grasim will own 60.3% in UltraTech
The boards of Grasim and UltraTech have approved the merger of their cement businesses. The shareholders of Samruddhi Cement (SCL), Grasim's demerged cement business would receive four shares of UltraTech (UTC) for every seven shares of SCL.

Highlights of the restructuring

■ The merger ratio of 0.57x (UTC:SCL) values SCL at US$107/ton (at UTC's current market price of Rs729) as against UTC's current valuation of US$79/ton (pre-merger).
■ The deal is marginally favorable to Grasim's minority shareholders, with economic interest in cement capacities going up from 29.1mt to 29.4mt.
■ Post merger, Grasim will own 60.3% stake in UTC.
■ The appointed date of the merger is 1 July 2010.

Both Grasim and UTC are attractively valued. Grasim trades at US$51/ton (~35% discount to UTC and 42% discount to ACC/Ambuja), at a significant discount compared to its historical average. Despite being the largest cement company in India and 10th largest in the world, UTC is trading at US$89/ton (~4.6x EV/EBITDA) - a 10% discount to replacement cost. We maintain Buy on both Grasim and UTC.

UltraTech: largest cement asset, with pan-India presence
Post-merger of SCL, UTC would be the largest cement company in India, with 49.4mt capacity (including white cement) and the 10th largest in the world. Unlike pre-merger, when its market mix was concentrated in the West, East and South, it would become a pan-India player, with healthy contribution from all regions.

Grasim: majority ownership to restrict holding company discount
Post restructuring, Grasim's standalone operations would be a pure-play on VSF and it would be a holding company for the cement business. It would be the third-largest VSF player in the world (AV Birla group is the largest player globally), with total capacity of334,000 tons. Grasim is investing Rs10b for setting up an 80,000-ton Greenfield VSF unit at Gujarat, which would take its total VSF capacity to 414,000 tons by FY13. Grasim (standalone) would have liquid investments of Rs22.7b and strategic investments valued at ~Rs21.6b in group companies.

Post announcement of restructuring plans, the Grasim stock has corrected by 18% and trades at an implied holding company discount of 35%, and 37-46% discount to ACC and Ambuja. Historically, it has traded at a median discount of 15% to ACC and Ambuja, and at a median premium of 10% to UTC. Unlike other holding companies that do not own majority stake of the operating company, Grasim would own 60.3% stake and would continue to control UTC. Hence, the current implied discount appears to be on the higher side. We maintain Buy, with an SOTP-based target price of Rs2,718. In our SOTP calculations, we have built in VSF at 4x EV/EBITDA, cement assets at US$80/ton (~20% discount to replacement cost), and embedded value of SCL shareholding (based on UTC's current market price).

To read the full report: GRASIM - ULTRATECH