ET Intelligence Group: The merger with Aditya Birla Chemicals consolidates Grasim Industries’ position in the caustic soda segment. After the merger, Grasim Industries becomes the largest caustic soda producer in the domestic market with a market share of 23% against 14% before the merger. Its caustic soda capacity will increase by 293 kilotonnes to 745 kilo-tonnes.

Besides caustic soda, Grasim also operates in the viscose staple fibre (VSF) segment. One of the advantages of the merger is that the caustic soda business is relatively stable than the VSF business. At present, due to VSF overcapacity in China, one of the biggest buyers of textiles raw materials, Grasim’s realisation from the VSF business has been subdued. In contrast, caustic soda, widely used across sectors such as textiles, pulp & paper, aluminium, and soaps and detergents in India, provides stability to the company’s chemical business.

Considering the financials of the two companies, the merger appears to be margin accretive. For the nine months to December 2014, AB Chemicals recorded an operating margin of 23% on sales of Rs 811 crore compared with Grasim chemical pision’s 18% margin on sales of Rs 1,271 crore. The combined entity may have an average operating margin of 20.5%.

For every 16 shares of AB Chemicals, shareholders would get one share of Grasim Industries. Taking into account the current market price of the two companies, Grasim would issue 1.46 million shares to fund the acquisition. According to industry estimates, the valuation of Grasim’s chemical business in terms of the enterprise value relative to the operating profit before depreciation (EV/EBITDA) is in the range of 5.5-6 times. AB Chemicals trades almost at par with an EV/EBIDTA of 6.1.

Grasim’s net profit may not get a big boost after the merger given its large scale of operations. During the nine months ended December 2014, it clocked a net profit of Rs 1,704, while AB Chemicals’ net profit was Rs 28 crore. Grasim’s 60.3% stake in UltraTech Cement, the largest cement company in India by capacity, will also enhance the merged entity’s revenues once cement demand picks up in 2-3 years.