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Grasim: Research meet extracts - Views on News from Equitymaster
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Grasim: Research meet extracts
Oct 10, 2005

We recently met with the management of Grasim to gain first hand view of the company of the prospects of its various business 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 sectors, with leadership position in four of its five businesses. The company has presence in viscose staple fibre or VSF (31% of sales in FY05), cement (45%), sponge iron (15%), chemicals (5%) and textiles (4%). While the company is a world leader in VSF with a 24% market share, it is also the seventh largest producer of cement in the world with a total capacity of 31 MT (nearly 22% of the country's capacity). It achieved the latter distinction only recently, post the acquisition of L&T's cement capacity for a net investment of Rs 22 bn.

Cement

The management has painted an optimistic picture of the cement industry scenario going forward. Though certain regional imbalances would continue for some more time, the demand-supply dynamics have been improving. While the Northern and the Eastern markets are the most favourable currently, the Western markets are moving towards better dynamics and should become balanced in 2006. However, the Southern markets could take some more time. Nonetheless, the gradual balancing of demand-supply would help keep average realisations firm. The company expects the cement demand to continue to grow at 7% to 8%, along with 6% to 7% improvement in average cement prices. However, higher input costs (coal, oil) would remain a challenge in protecting these gains from higher realisations. Further, the companyís cement production would stand augmented by 1.5 MTPA by 2007.

VSF

The company sees the environment to remain tough in the VSF business. However, it sees margins improving post 2HFY06 and it remains positive over the next couple of years. It must be noted that over the last few quarters, high cotton crop had led to lower cotton prices, the impact of which was visible on lower realisations for VSF also. Further, with input costs on the rise, the margins came under pressure. However, volume sales having stabilised and things should improve from hereon.

Others

The other businesses of Grasim include the sponge iron and the textiles (man-made fibre/yarns) business. The company expects its sponge iron divisionís margins to settle at lower levels, with scrap prices having gone into a downward trend in the recent past, which would affect the prices of sponge iron. As far as its textiles division is concerned, the company seemingly would be happy with this division achieving break-even and has no great expectations from this segment.

Our view

Considering the fact that Grasim (consolidated) has a significant presence in the cement business with over 60% of its revenues being contributed by this division and the outlook on the cement sector for the next 2 to 3 years remaining positive, we believe that the company is well placed to capitalise on the available opportunity. Further, with the company having indicated improvement in margins post 2HFY06 in its VSF business (20% of consolidated revenues), which it should be able to sustain, the financial performance outlook going forward remains encouraging. However, the discomforting areas remain the sponge iron and textiles business, which could prove to be a drag on the company. We have recently updated our Grasim research report, which reflects how the above scenarios percolate down to the bottomline of the company. Also, to view our recommendation on the stock, click here .

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