Grasim cement unit attracts international giants - Views on News from Equitymaster

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Grasim cement unit attracts international giants

Mar 17, 2000

Grasim Industries Limited has received bids from a number of domestic and international players for its cement plant in eastern India. The company had put the plant on the block after the realisations in the region declined significantly. Grasim (FY99 Turnover Rs 34.13 bn), part of the Aditya Birla Group of companies, has interests in viscose staple fibre (VSF), cement (28% of sales), textiles and sponge iron. The company has stated that it is in the process of selling off its sponge iron business.

Lafarge, Cement do France and Cemex are among the international giants that have bid for the plant which is valued at approximately Rs 5 bn. The attractiveness of the Indian market for international companies is apparent. With over Rs 7.6 trillion likely to be spent on infrastructure over the next 20 years, demand for cement is expected to grow rapidly.

The domestic cement sector has been plagued with fragmentation. This has resulted in excessive price competition across the country. In recent years, when demand declined on account of the slowdown in industrial activity, the competition became fiercer leading to large-scale losses in the sector. However, in the last one-year there has been a significant recovery in demand (from the housing sector) and prices. The rise in prices however has at best been erratic and at times unsustainable. This is mainly due to sporadic spending on infrastructure and a slow pick up in industrial investment activity. The two to three year trend for cement prices is nevertheless attractive in view of the narrowing of the demand supply gap.

Grasim’s decision to sell the cement unit is driven by excessive intense competition unleashed by Lafarge in Eastern India. Lafarge had earlier acquired the cement unit of Tata Steel. The sale of the cement plant will raise resources for Grasim, which can then be used to repay debt and fund investments in core areas of operation.

However, as mentioned earlier, Grasim has identified cement as a key focus area and therefore its decision to quit the eastern market does not seem logical. Instead the company should be looking at consolidating its position in the eastern market to ensure a national presence.

Market View:
Analysts have rated the stock as a 'BUY' mainly on account of the turnaround in the cement industry and various other commodity businesses the company operates in.

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