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Grasim: Cementing the future - Views on News from Equitymaster
 
 
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  • Sep 26, 2003

    Grasim: Cementing the future

    Grasim, a flagship company of the Aditya Birla group, is the lowest cost producer of VSF (viscose staple fiber) globally and is almost a monopoly in VSF in the domestic market. Post the acquisition of L&Tís cement capacity, Grasim has also emerged as the largest cement producer in the country with a capacity of close to 29 m tonnes. Sponge iron (a raw material required in the manufacture of steel), chemicals and textiles are the other businesses of the company.

    In this article let us have a look at the companyís recent performance and also study the future prospects of the company.

    A record performance by the companyís VSF division in FY03 more than compensated for the cement divisionís poor contribution to the topline. The VSF division clocked a strong 26% growth and was largely assisted by a huge 52% growth in exports. The exports formed almost one third of the total revenues of the VSF division. The contribution to the topline of the companyís other major division, cement, suffered on account of 12% fall in the prices of cement, though volumes recorded a strong 15% growth. While the sponge iron and the chemical business of the company also performed well in FY03, the textile division continued to remain a drag on the bottomline of the company.

    Overall the company recorded a moderate 6% growth in its topline while the net profits of the company grew by a healthy 21% in FY03. The company also incurred a huge loss of around Rs 1.7 bn on the sale of shares of MRPL. Had it not been for this one time write off, the bottomline of the company might have looked even better.

    FY03 was a very good year for Grasimís VSF business with margins reaching an all time high on the back of not only one of the highest sales volumes recorded in recent times but also because of the lower prices of the main inputs. However, going forward, the domestic demand for the VSF fiber is expected to remain stable and with the prices of main inputs showing an upward trend, the margins of the company are likely to come under pressure. Although the company is venturing into niche segments such as specialty fibers and introducing Ďhigh wet modulus fiberí for the branded garment industry, whether this will manifest itself in increased topline and margins remains to be seen. Also, the cyclical nature of the VSF division makes it difficult to make a sound judgement about the future prospects of the division.

    With the acquisition of L&Tís cement division, Grasim has clearly indicated that it is in the cement business for the long haul. The move has catapulted Grasim to the number one position in the Indian cement industry. The acquisition will not only give Grasim the benefits of economies of scale and increased pricing power, it will also give it a pan India presence, which will ensure that poor performance in one region is compensated by an improved performance in the other region. Also, the acquisition comes at a time when cement industry is experiencing a healthy growth rate of 8-9% and with prices showing signs of recovery,Grasimís cement division seems well poised to take over the mantle of the companyís growth propellant from the VSF division. The VSF division on the other hand is likely to act as a cash generator for the company.

    The outlook for Grasimís sponge iron division remains positive on account of rising steel demand both globally and in the domestic market. However, the gas pricing policy and question marks over the availability of natural gas (the companyís sponge iron plant is gas based) in the long term might act as dampeners. The companyís other division of textile continues to remain a drag on the bottomline despite the restructuring efforts.

    The stock is currently trading at Rs 627, a P/E of 10.3x of its annualised FY04 earnings. The stock price has appreciated by almost Rs 200 since the L&T cement acquisition. While the long term gives confidence on the companyís focus and growth strategy, in the short term, one would have to wait and watch how the L&T cement division is made part of the overall company and how soon the acquisition benefits start accruing.

     

     

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