Samruddhi Cement

Samruddhi Cement, which now owns Grasim's cement business, is set to list on the bourses on Tuesday. The listing is part of the restructuring process of the cement business at the A V Birla group. As part of the arrangement, the company will be merged with UltraTech on July 10. Hence, one can expect hectic action in Samruddhi Cement as well as other companies like Grasim and UltraTech.

According to the plan, four shares of UltraTech would be issued for every seven shares of Samruddhi. Based on this ratio, and the current market price of UltraTech at Rs 923 a share, four shares of UltraTech would be available for Rs 3,692 in all. In other words, seven Samruddhi shares would be available for Rs 3,692, or Rs 527 a share. Analysts, therefore, expect the listing price of Samruddhi to be in the Rs 520-535 range. The opportunity for investors could come at a listing price that is lower than the estimated fair listing value.

A positive movement in the UltraTech share price, or a strong listing, could also change the equation. Experts reckon that a premium-to-fair value of even 15 per cent could generate returns for investors wanting to pick up shares in Samruddhi, as it would only be a proxy for UltraTech. The consensus price estimate for UltraTech is positive and analysts expect a 25-30 per cent gain when the merger takes place.

The merger would make UltraTech the largest cement company in India with a capacity of around 49 million tonnes per annum. Moreover, UltraTech would be able to spread its panIndia presence as, at the moment, it has no presence in the north and central parts of India. Post-merger, both these areas would contribute around 25 per cent of the revenues.

Already, UltraTech has been an extremely cost-competitive company and has managed to reduce power costs from Rs 1,800 a tonne in the March 2009 quarter to around Rs 625 per tonne in the March 2010 quarter. Further its operating profit margins grew from 26.7 per cent in the financial year 2009 (FY09) to 28 per cent on FY10. Its net earnings grew 12 per cent in FY2010 and is expected to maintain the same pace in the next three years, even though the per-share dynamics would remain flat.

So, the use of conversion matrices, as well as the 15 per cent premium-to-fair value, could well be the benchmark for investing in Samruddhi. In case the price shoots up, shareholders of Grasim who got these shares could cash in.