X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Grasim in BIG league - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Nov 19, 2001

    Grasim in BIG league

    In what can be termed as a coup of sorts, the Aditya Birla Group has bought out Reliance's over 10% stake in Larsen & Toubro for a total consideration of around Rs 7.7 bn. The deal was consummated at a strike price of Rs 306.6 per share of L&T. This price is at a 47% premium to the L&Tís ruling price in the stock market. The Birla Group is buying the stake via its flagship company, Grasim Industries.

    The deal makes business sense for both the concerned parties Ė Reliance and Grasim. While, Reliance gets an opportunity to encash an investment that didnít quite turn out the way it was meant to (Reliance did try to mount an unsuccessful takeover on L&T several years ago), Grasim gets to consolidate its presence in the cement sector.

    The pricing of the deal, although at a sharp premium to the market price, is not out of line with the L&Tís fair price, which has often been put at around Rs 330 per share (using an enterprise value per tonne of cement capacity of US$ 80 and a market cap to sales of 1 for its EPC business). Grasim, it is reported, proposes to pay for the deal from internal accruals.

    How does Grasim stand to benefit from this deal?
    Letís look at the macro picture first. The Gujarat Ambuja Ė ACC deal resulted in an alliance, which now controls roughly 25% of effective cement capacity in India (27 million tonnes). The L&T Ė Grasim alliance too will control another 25% of the market (over 29 million tonnes). In other words, the large players will account for over 50% of the market i.e. consolidation. With lesser competition, this will have its benefits in terms of better realisations. The deal will also, possibly, block the entry of a large MNC cement company.

    Although it is yet unclear what kind of an alliance will develop between L&T and Grasim, significant synergies could be unlocked by working more closely in terms of raw material procurement and sharing technological know how.

    One other scenario needs to be considered. Grasim does not have any interest in the EPC business, in which L&T is a leader. There is no reason to doubt that the main driver of this deal is L&Tís cement business. Grasim may be looking at a possibility of selling off its stake in the EPC company post the demerger of the cement business. Subsequently, Grasim could initiate steps to increase its stake in the cement company. This would bring in greater focus into its operations (also unlock funds used to purchase EPC business).

    Apart from cement, Grasim directly benefits from L&Tís other interest areas. L&T has presence in finance, leasing and software through its subsidiaries L&T Infotech and L&T Finance. With Birla Global Finance and PSI DataSystems under its belt, the acquisition bodes well for Aditya Birla Group in the long run. In effect, as these business interests are aligned, the overall cost of acquisition for Grasim would reduce.

    However, there are some concerns. A 10% stake in L&T does not give Grasim effective control of the company i.e. it is just an investment. The Rs 7.7 bn investment will earn a dividend yield of just 2.1% based on L&Tís last declared investment. Although there are likely to be benefits (as discussed above), the true value can be realised only with the effective restructuring of L&T i.e. demerger of its businesses.

    What are the implications for L&T?
    L&Tís cement division would ofcourse benefit from the better economies of scale and pricing environment. However, the main issue will be the impact of this transaction on the demerger process that the company had undertaken over a year ago. If the process were to be expedited the markets would surely look positively at both the companies.

    While L&T presently trades at Rs 208.5, implying a price to earnings ratio of 12.2x (FY02 earnings), Grasim trades at Rs 285.9, at price to earnings ratio of 5.4x (FY02 earnings).

     

     

    Equitymaster requests your view! Post a comment on "Grasim in BIG league". Click here!

      
     

    More Views on News

    UltraTech: Post-Acquisition Cement Capacity Augmented to 93 MTPA (Quarterly Results Update - Detailed)

    Aug 11, 2017

    UltraTech Cement completed the acquisition of cement plants of Jaiprakash Associates Limited (JAL) and Jaypee Cement Corporation Limited (JCCL) during the quarter ended June 2017.

    Ambuja Cement: Fall in Other Income Drag Bottomline Lower (Quarterly Results Update - Detailed)

    Aug 11, 2017

    While topline witnessed growth on the back of higher cement sale volumes, a 50.5% YoY fall in other income weighed on Ambuja's bottomline during the quarter ending June 2017.

    ACC: Cementing Growth through Capacity Expansion and Favorable Sectoral Developments (Quarterly Results Update - Detailed)

    Jul 20, 2017

    Expanded capacity helped ACC strengthen its market presence in eastern region during the quarter ended June 2017.

    UltraTech: One of the Weakest Quarters in Years (Quarterly Results Update - Detailed)

    May 18, 2017

    Cement demand was weak because of subdued housing demand, volatile cement prices, and rising fuel costs.

    Ambuja Cem: Net Profits zoom up 361% YoY During Jan-March Quarter (Quarterly Results Update - Detailed)

    May 8, 2017

    Stock price jumps up on Ambuja-ACC merger talks...

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    GRASIM IND. SHARE PRICE


    Aug 18, 2017 (Close)

    TRACK GRASIM IND.

    • Track your investment in GRASIM IND. with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
    • Add To MyStocks

    GRASIM IND. 5-YR ANALYSIS

    Detailed Financial Information With Charts

    COMPARE GRASIM IND. WITH

    MARKET STATS