According to newspaper reports, Grasim Industries is in talks with SIV industries to acquire a controlling stake in the latter. SIV has a VSF capacity of 33,000 tonnes and a wood pulp capacity of 60,000 tonnes. Grasim, on the other hand, is the largest producer of VSF in India with a market share of 82%.
Grasim (FY99 Turnover Rs 34.13 bn), part of the Aditya Birla Group of companies, has interests in viscose staple fibre (VSF), cement (28% of sales), textiles and sponge iron. The company has stated that it is in the process of selling off its sponge iron business.
With this acquisition, Grasim will have a virtual monopoly in the domestic VSF industry. In a commodity-based business, like VSF, the key to profits lies in large volumes and a low cost structure. While Grasim was able to keep its head over the water when the industry cycle turned downwards, companies SIV incurred large losses as their small manufacturing capacities were not competitive enough in terms of cost structure.
Grasim is in a position to turnaround SIV Industries mainly due to its low cost structure, access to new technology and managerial experience in operating in most competitive markets. SIV needs input on all these counts and hence the fit.
Grasim will however, as reported, need to take on large liabilities (including debt of Rs 4.4 bn) if the acquisition were to go through. Given the acquisitive mode it has been in recently, this would lead to the company taking on more debt to fund the acquisition. This may not augur well for the company's bottomline in the near term.
Analysts have rated the stock as a 'BUY' mainly on account of the turnaround in the cement industry and various other commodity businesses the company operates in.
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