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Grasim: Revised estimates - Views on News from Equitymaster

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Grasim: Revised estimates
Nov 25, 2009

Grasim Industries recently announced its plans to demerge cement division. The move is in line with the companyís plans to create a separate platform for its core activities - cement and VSF businesses. The company plans to transfer its cement assets to a wholly owned subsidiary- Samruddhi Cement, which would be later merged with UltraTech. This move would lead to consolidation of cement assets under Aditya Birla group. The board of UltraTech has also positively reacted to this move and has drawn the plan to merge Samruddhi Cement with itself by 2QCY10. These changes will impact the balance sheet of both the companies. In case of Ultra Tech, it is acquiring assets by issuing additional capital. In case of Grasim Industries, its standalone financial position would be significantly impacted. This is because Cement division contributes nearly 55% to the topline and operating profits (average of past five years) of Grasim Industries. The de-merger of cement division would shrink the standalone balance sheet of the company. However, from shareholders point of view, there is no loss of economic interest. This is because Grasim has merely transferred cement assets to a wholly owned subsidiary.

We have factored in these future plans of the Grasim to de-merge cement assets and consolidate it with UltraTech- currently a 54.8% subsidiary of Grasim.

As mentioned earlier, owing to the demerger move, Grasimís standalone balance sheet would not include cement assets FY11 onwards. The de-merger process is expected to be completed by FY10. Thus, FY10 earnings per share (EPS) would include cement division earnings. FY11 onwards, standalone earnings would mainly comprise of VSF and Chemical segments. On account of this restructuring of assets, Grasim Industries EPS would show a significant drop in FY11. We would like to reiterate the point that cement division earnings FY11 onwards would be captured under Grasimís consolidated earnings and not under the standalone entity.

However, since we make projections based on the companyís standalone financials, the numbers for the cement division may not get reflected in our projections for the year FY11 and FY12. And hence, we would use a different valuation approach to value Grasim than we are using right now. But this has created a unique problem for us. The P/E based valuation approach that we are using for the year FY11 and FY12 has distorted the value for the year FY10, which also includes the numbers for the cement business. Our subscribers could do well to remember that the correct value per share for the year FY10 works out to be Rs 1,858 per share and not Rs 6,828 as shown in the report. Inconvenience is deeply regretted. We have also displayed a small note in bold in the BUY/SELL section of the company report.

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