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Grasim: What lies ahead?

Dec 31, 2002

Grasim, one of the key companies in the Aditya Birla Group, is a diversified major. It has a monopolistic status in the viscose staple fibre segment (VSF) (30% of FY02 turnover) and is the 3rd largest cement producer with total capacity in excess of 13 m tonnes (46%). The company also has business interests in textiles (6%) and sponge iron (7%). The company has been very much in the news after it announced its open offer for L&T. But moving away from that issue we would like to point out that Grasim’s fundamentals are very strong.

Though the margins of its cement business have fallen due to poor realisations, the VSF margins are improving. Better realisation coupled with the cost cutting measures (distribution and fuel costs) have resulted in a sharp expansion in margins – 18% in FY02 as compared to 13% in FY00. The margins for the first half of FY03 were 25%. Margins are likely to further improve once cement realisations start improving, hence directly impacting the bottomline. The company’s VSF business is witnessing a turnaround. The healthy growth in topline and operating margins can be attributed to this turnaround.

But for its growth plans Grasim has identified cement as a key growth driver in the coming years. Indeed, it is likely to add 3.3 m tonnes of capacity by FY03. This capacity is being added at a cost of Rs 1,800 per tonne, which compares well with the best in the industry. To achieve value growth, the company is setting up ready mix concrete units and increasing its presence in the retail market. The cement sector offers a tremendous growth opportunity for Grasim. Demand from the housing and infrastructure (road) sectors will benefit the company. Apart from this, the fact that addition to national cement capacity is slowing down will benefit the company in terms of a better pricing environment.

Coming back to the SEBI investigation into the allegation that Grasim has obtained management control of L&T without making an open offer. If these allegations are proved then Grasim will have to make an open offer at Rs 306 per share for 20% additional stake in L&T. This will involve a considerable amount of expenditure on behalf of Grasim, which it may finance through borrowings. However, this allegation may prove to be unfounded given the recent public spat between Grasim and the L&T management over the cement demerger issue. Recent developments indicate that Grasim may be able to convince the financial institutions to sell their stake in the proposed demerged cement entity. In the long run this is beneficial to Grasim due to its aggressive focus on the cement sector. Grasim will be able to attain significant capacities (nearly 15 m tonnes) and reach across the country. This will consolidate the cement industry, further improving realisations.

Company Capacity (m tonnes) Market share Regions
L&T 15 15% South, West, North and Eastern India
Grasim 13 13% Central, Western and Southern India
Combined 28 28% Reach across the country

The stock is currently trading at Rs 311, a P/E of 6x its FY04 expected earnings. Though low realisations are a short-term concern, cement demand is likely to be strong in the next two to three years. Also, VSF’s turn around is a positive. Apart from that the bottomline is also likely to improve considerably due to cost cutting measures like VRS and closing of inefficient operations. Considering its low valuations based on its expected FY04 earnings the stock may catch investor fancy in the near term.
For more details please refer to the updated research report on Grasim.

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