Is there more to Grasim's move to spin-off its cement business and merge it with its 51% subsidiary UltraTech Cement? While the mainstream analysis is focussed on the contours of the deal, we at ET Intelligence Group think that the deal's relevance goes much beyond and could open up lot of profitable opportunities for the patient investors.
Readers should recall that Kumar Mangalam Birla is heir to the business assets of his grandfather BK Birla. The BK Group's companies -Century Textiles & Industries, Kesoram Industries, Mangalam Cement and Century Enka are together are among the largest manufacturers of cement, tyres, textiles, tyre cord and paper in the country. This broadly intersects with the business interests of Aditya Birla group.

Now this is where the latest move by Grasim comes into the picture. The planned merger of Grasim's cement division with UltraTech Cement could be the precursor to the eventual integration of the BK Birla group companies with Aditya Birla group. Though a possibility, but investors need to be ready if they want to gain from one of the biggest assets transfers in Indian history.

But you may ask how big it is for investors? Consider the following. During the year ending March 2009, the BK Birla Group's four key companies reported combined revenues of nearly Rs 10,000 crore and net profit of around Rs 800 crore, making them one of the top business houses in India. More interestingly, nearly half of the group's turnover was accounted for by cement business, spread across three companies. If all the group's cement assets are housed in a single entity, it would be India's fifth-largest cement maker, ahead of India Cements. The group companies have benefited greatly from the economic boom and are now expanding aggressively especially in cement, tyres and paper. For instance in last four years, the group's cement capacity has nearly doubled to 15 million tonnes by the end of FY09 and is expected to top 20 million tonnes in next three years. Besides, the group companies -Kesoram Industries and Century Textile are aiming for the pole position in the domestic tyre and paper market respectively.

Now think of the scenario where these mature businesses are integrated into Aditya Birla Group to create sectoral behemoths commanding premium valuations. For instance, if the BK Birla Group's cement business is merged with UltraTech Cement in future, it will create one of world's top cement makers controlling a third of the Indian market.

Similarly, the consolidation of the two group's pulp, paper and fibre and textile businesses will create an industry leader with revenues of over Rs 6,500 crore. Moreover, the combined entity will be one of its kinds with presence across the entire fibre value chain ranging from pulp, fibre (both cotton & synthetic), textiles, fabrics, garments and paper. This would certainly command a premium over its peers on the bourses.
The most interesting development could however be in the tyre business. Kesoram Industries is on course to emerge as one of the top three tyremakers in the country,but the limelight is hogged by the cement division. This depresses the valuation of the tyre division on the bourses. The problem would be solved once the Kesoram's cement division is spun-off and merged with UltraTech Cement. Here it must be noted that another BK Birla company, Century Enka is India's largest manufacturer of nylon/polyester cord, while Aditya Birla Nuvo is one India's leading manufacturer of carbon black, both are key ingredients in tyre manufacturing.

But how can an equity investor profit from this likely re-alignment in the Birla Group. The idea is simple. BK Birla companies are currently one of the cheapest counters in their respective sectors. For instance, Kesoram Industries is trading at a price-toearnings (P/E) multiple of 5. In comparison most of its peers in the tyre and cement business are trading in range of 8-15 times their earnings. Mangalam Cement, another BK Birla group company is even cheaper and trading just 3.4 times its trailing 12-months earnings.

In contrast, Aditya Birla group companies - Grasim Industries, UltraTech Cement, Hindalco and Idea Cellular among others, get premium valuation on the street. Post integration, there is likely to be re-rating of the price-to-earnings multiple of BK Birla group stocks in line of the valuation of AV Birla group companies, which are in the similar lines of business. This in itself will provide good upside potential to investors willing to hang on.

The integration will also unleash lot of synergic benefits as enumerated above. This will create long-term shareholder value. The mega bucks on Dalal Street are made by those smart enough to spot a big wave early. This could be one of the big waves in many years, so why not ride it. Anyhow, there's hardly any downside risk in the strategy. Are you game?

---from a source.

Which of these Cement co to buy & hold Shiree sir

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The article suggests Kesoram & Mangalam If it has to be one of the two then Kesoram would be better coz of the tyres biz.

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The past is a bucket of ashes if it says nothing about the future

Kesoram I think primarily , and Mangalam also.
The most interesting development could however be in the tyre business. Kesoram Industries is on course to emerge as one of the top three tyremakers in the country.

Consolidation in cement biz = Kesoram cement div + Mangalam + Century Textile cement div
Plus they have Century Enka which acts as a back-end integrator for Kesoram's tyre biz (specially the radial variety)

This much is clear to me. But the inter-brother consolidation is not so clear (of-course it makes more sense if one assumes they will get into bhai-bhai mode & start merging their businesses - but that's too much of a speculation imo)

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The past is a bucket of ashes if it says nothing about the future