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Grasim: Research meet extracts - Views on News from Equitymaster

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Grasim: Research meet extracts
Mar 22, 2007

We recently met Grasim to get a perspective of the various developments taking place within the company and the key sectors it operates in i.e. cement, VSF, sponge iron and textiles. Here are the key extracts of the meeting. What is the companyís business?

Grasim, an Aditya Birla Group company, has presence in various businesses. It has presence in viscose staple fiber, cement, sponge iron, chemicals and textiles. While the company is amongst the world leaders in VSF with approximately 11% market share, it is also the eleventh largest producer of cement in the world and seventh largest in Asia with a total consolidated capacity of 31 MT (nearly 20% of the country's capacity). It achieved the latter distinction post the acquisition of L&T's cement capacity for a net investment of Rs 22 bn.

Cement:

The Company stated that it expects demand-supply to remain tight in the medium term. The company expects the cement demand to continue to grow in line with the GDP growth rate. Cement demand in the country grows at roughly 1.5 times the GDP growth rate, which means that even if one expects GDP to grow at 7% to 8% then demand for cement will grow at approximately 10% to 12%. As per the company, current cement prices will sustain in medium term as it expects tight supply scenario across regions. The company has outlined investment of approximately Rs 37 bn to increase capacity by 8MTPA in the next couple of years, modernize and up grade existing production facilities and set up thermal power plants to reduce costs. The company does not foresee any significant cost pressure as it has planned to set up captive power plants at 6 locations and to use alterative fuels for flexibility and cost optimisation.

VSF

The company has painted an optimistic picture of the VSF business going forward. Though in the recent past, high cotton crop had led to lower cotton prices, the impact of which was visible on lower realisations for VSF also, outlook for the sector remains positive on account of increasing domestic consumption and rising exports. The company is focusing to enlarge markets by introducing high value niche fibres (VSF non-woven products). Going forward, company expects prices to remain firm on account of robust demand in the global and domestic markets. The company has recently entered into a joint venture with Hubei Jing Wei Chemical Fibre company in China. The spread and scale of operations makes the Group's VSF operations very cost competitive. To capitalize on the growing demand, company has outlined approximately Rs 7 bn capex to modernize and increase capacity to 316 thousand TPA from the current 266 thousand TPA. It also plans to invest Rs 2 bn on modernization The companyís competitive edge is further enhanced by its backward integration into raw materials (Chemical division of the company).

Other Business:

The other businesses of Grasim include sponge iron, chemicals and textiles (man-made fibre/yarns). The company expects its sponge iron divisionís margins to settle down at lower levels on the back of softening of scrap prices (a competing raw material). As far as textile division is considered, the growth in fabric demand is expected to continue with the growth in exports. Profitability is expected to improve on account of growing demand and operational efficiency (modernization and commissioning of thermal power plant). However, higher raw material and power costs may offset increased realisations.

To improve efficiency of chemical business, the company has converted its remaining Caustic Soda plant based on mercury cell technology into the new energy efficient and environment friendly membrane cell technology. Though the company expects prices to stabilise at the current levels, the company expects to benefit as volumes improve with optimum utilization of plant capacity.

Our View:

Grasim has a significant presence in the cement and VSF business with almost 80% of its revenues being contributed by these divisions. Considering the fact that the company is the only player in VSF business domestically and the outlook of VSF (from a long term point of view) and the cement sector for the medium term remaining positive, we believe that these two divisions will continue to drive the top line growth in medium term. Further, with the company having indicated better prospects for VSF business (approximately 20% of consolidated revenues), the company will continue to enjoy better realisations. Considering these factors, the financial performance outlook going forward remains encouraging. However, the discomforting areas remain the sponge iron business, which could prove to be a drag on the company and softening of cement prices once the announced capacities come onstream.

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