Grasim offers to acquire 30% stake

Grasim Industries has made an open offer for acquiring a 30 per cent stake in Ultratech Cemco. The company came into existence after the demerger of Larsen & Toubro’s cement business. The offer price stands at Rs 342.60 per share. The offer is currently open and will close on June 21, ’04. The existing L&T shareholders will get four shares of Cemco for every 10 shares held and five shares of L&T without its cement division (reports The times of India).

Cemco, with a capacity of 17Mta, is pure cement play. It currently has a 10.5 per cent market share in the country. The main advantage for the company is that it has large plants, well above the economical size of 1Mta. The average age of its plants is well below the industry average, which leads to lower operational cost. The company’s plants are located at Pipavav (Gujarat), Chandrapur (Maharastra), Tadipatri (Andhra Pradesh) and Hirmi (Madhya Pradesh). Cemco’s debt servicing cost is marginally higher and the new management might decide to go in for a financial restructuring exercise. This is likely to lead to a marginal improvement in the net margins.

Grasim’s current offer price seems to be attractive from an investor’s point of view. The price being paid by Grasim includes the control premium, which the company is paying in order to become the largest player in the industry. There is a higher risk of the post-listing price not including this part of the offer price and the stock quoting lower than the offer price. On current earnings, the price earnings multiple at which the offer is being made is high as compared to ACC and GACL.