In a move that is aimed at consolidating the cement businesses of the Aditya Birla Group, the board of directors of Grasim Industries and Samruddhi Cement, a wholly-owned subsidiary of Grasim, approved a proposal to demerge the cement business of Grasim into Samruddhi.

Accordingly, Samruddhi will issue one new equity share to Grasim shareholders for every equity share they hold in Grasim, in addition to their existing Grasim shares. On completion of the demerger, Grasim shareholders will directly hold 35 per cent of Samruddhi and Grasim’s stake will be diluted to 65 per cent. Samruddhi is proposed to be listed after the demerger. The demerger is likely to be completed in the fourth quarter of the current fiscal while listing could take about six months.

As a separate matter, Samruddhi has resolved to pursue onward consolidation of the cement business and will make a formal consolidation proposal to the board of Aditya Birla Group company UltraTech Cement.

The appointed date for the restructuring transaction is October 1, 2009, and under this, Grasim will transfer its cement businesses, including related businesses and investment but excluding UltraTech, to Samruddhi.

Addressing media, Adesh Gupta, whole-time director and CFO, Grasim, said, “The combination of Samruddhi and UltraTech is the next desirable step to create a pure single play cement player with a 49 million tonne capacity. The current measures are intermediate and ultimately we want to consolidate the cement business. If UltraTech also starts the process as Samruddhi has, we can ensure the right valuation. Consolidation of the business could happen in about 8-10 months”.

On the rationale for the proposed restructuring, Kumar Mangalam Birla, Chairman, Aditya Birla Group, said in a statement that “the board considered various other options before concluding and approving the structure. It reaffirmed its continuing interest in the cement business and hence wanted to consider only those restructuring proposals which ensured continued control and strategic interest”.

“The restructuring move is designed to ensure Grasim’s majority stake in and continued support to the rapidly growing cement business; while providing Grasim shareholders direct participation in the pure play cement company”.

For Grasim to continue holding on to its 19 per cent share in the Indian cement market, it will have to invest up to Rs. 15,000 crore to create the required 25 million tonne capacity. “While Grasim’s commitment to fund necessary capital for the growth of cement business remains unabated, the demerger opens up new choices to finance growth in the cement business,” said Mr. Gupta.

Grasim is at an inflexion point and the strategy of using viscose staple fibre (VSF) cash flows to grow cement has succeeded and cement today accounts for over 67 per cent of Grasim’s standalone operating profit as against 30 per cent in 2003-04. It is setting up an 80,000-tonne greenfield VSF plant at Vilayat, Gujarat, at an investment of Rs. 1,000 crore to raise its total VSF capacity by a fourth. Commercial production is to commence in 2012-13.