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Grasim: Sponge iron on the block

Jun 12, 2001

According to unconfirmed reports, Grasim has put its sponge iron unit on the block. The move is in line with the company’s stated objective of focusing on its key areas – cement and VSF. The sale of the unit will bring in more focus in its operations, apart from the cash that it will generate. The sponge iron unit of the company, which has a capacity of 900,000 tonnes, has at best turned in a mixed performance in recent years. The reason for this has been that the performance of the division has been dependent on the supply of feedstock from GAIL. This has been erratic and in short supply. As a result, the unit’s performance over the last few years has been very volatile.

The decision to put the unit on the block is beneficial to the company from two main standpoints. First, iron is not a competency of the group and in view of the liberalized import scenario the division could see a sustained rise in competition. This could take its toll on margins.

Second, and more importantly, this deal could raise much-needed funds for the company, which is in process of expanding its cement capacity by undertaking the debottlenecking and modernisation of several plants. The company has invested over Rs 7 bn in this unit so far. Even if it were to recover this, it would more than meet its total capital expenditure requirements for FY02 and FY03 (estimated at Rs 5.4 bn).

The stock currently trades at Rs 334, implying a P/e multiple of 6.4x based on FY01 earnings.

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