>GRASIM INDUSTRIES:Samruddhi lists today; to be merged with Ultratech by July end (UBS)

■ Upgrade to Buy after significant underperformance
We upgrade Grasim from Neutral to Buy and remove our short-term Sell rating on: 1) significant underperformance since the fixing of the record date of the demerger of the cement business i.e. 14 May 2010; and 2) compelling valuation at EV/T of US$80/t (US$115-140/t for other larger companies). We do not change our earnings or valuation estimates; we remove the value of the demerged cement business of Grasim (Samruddhi Cement, which lists today) and consequently, lower our price target to Rs2300 (from Rs2,875).

■ Samruddhi lists today; to be merged with Ultratech by July end
Samruddhi (the demerged cement business of Grasim) lists today on the BSE/NSE. We expect Samruddhi’s share price to mirror Ultratech’s share price in the ratio of 4:7 (i.e. one share of Samruddhi to trade equivalent to 4/7th of Ultratech’s share price) as Samruddhi will be finally merged with Ultratech (four shares of Ultratech to be issued for seven shares of Samruddhi) by July end.

■ Ultratech to become largest cement player post merger
Ultratech will emerge as the largest pure-play cement company in India with a capacity of 48.8mt. It is planning to add additional 25mt capacity in the next five years. Post merger with Samruddhi, Ultratech’s shares outstanding should increase to 274m from 124.5m shares (124.5+261.7*4/7). Samruddhi’s shares outstanding are 261.7m (including 91.7m shares issued to Grasim’s shareholders).

■ Valuation: upgrade to Buy; adjust price target to Rs2300
We continue to value Grasim on a sum-of-the-parts basis with Cement on 6.5x EV/EBITDA, VSF on 5.5x EV/EBITDA, and apply a 10% holding company discount to the cement business.

To read the full report: GRASIM INDUSTRIES