Mumbai, Oct. 3: Grasim Industries today took an intermediate step to create a consolidated cement entity — it spun off its cement business to Samruddhi Cement, a wholly owned subsidiary. Samruddhi will subsequently merge the cement business with UltraTech Cement Ltd, in which Grasim holds around 55 per cent.

Samruddhi will make a formal proposal to UltraTech “as soon as possible”.

If successful, the merger will create a cement giant with a capacity of 49 million tonnes. At present, Grasim’s capacity is 26 million tonnes.

While the decision to demerge the cement business was taken at a board meet today, the consolidation route adopted by the AV Birla group company came as a surprise to many. It was largely expected that Grasim would spin off its cement business to UltraTech.

Samruddhi will issue one equity share to Grasim shareholders for every share held in the company. On completion of the demerger, Grasim shareholders will directly hold 35 per cent in Samruddhi, while Grasim’s stake will come down to 65 per cent.

The AV Birla group also plans to list Samruddhi.

Adesh Gupta, chief financial officer and whole-time director of Grasim, said the demerger should be completed by the fourth quarter of this fiscal. If Samruddhi decides to take up the consolidation plan with UltraTech and the latter accepts it, it could take up to nine months for the entire process to be completed, Gupta added.

“As this transaction requires the approval of shareholders, courts and stock exchanges, it could take four to six months for the process to be completed. The whole programme (consolidating the cement business with UltraTech) depends on UltraTech’s response. However, UltraTech will not have to wait for six months. The process can simultaneously happen,” Gupta said, hinting that Samruddhi was likely to place its proposal soon.

Sources at DSP Merrill Lynch, which advised the Birla group company on the transaction, said the intermediate route was taken to give shareholders direct exposure to the cement business. The move will also help retain Grasim’s parentage, which will be useful in raising finances for future expansions.

“The restructuring move announced today is designed to ensure Grasim’s majority stake in, and continued support to, the rapidly growing cement business; while simultaneously providing Grasim shareholders direct participation in the pure play cement company,” Kumar Mangalam Birla, chairman of the AV Birla group, said.

It is expected that Grasim will continue to hold over 55 per cent in UltraTech should Samruddhi be merged with the company.

Gupta said the Birlas had lined up aggressive plans for cement. While the market share of Grasim and UltraTech is now over 19 per cent, the group needs to create a fresh capacity of 25 million tonnes if it wants to maintain its position. This alone will require an investment of Rs 15,000 crore.

VSF facility

Grasim today said it would invest Rs 1,000 crore to set up a plant at Vilayat in Gujarat to produce viscose staple fibre (VSF) .

The facility will have an annual capacity of 80,000 tonnes. VSF is a man-made bio-degradable fibre with characteristics of cotton.

The facility is expected to start commercial production by March 2013 and will increase Grasim’s capacity by about 25 per cent.

“Most of the requisite permissions for the plant have been received. This will reinforce Grasim’s position as a world leader in VSF. Grasim will continue to invest in VSF and other businesses as further opportunities unfold,” the company said.