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Grasim Ind: How to be a winner with a single product - Outside View by Luke Verghese
 
 
Grasim Ind: How to be a winner with a single product

It is indeed fortunate that Grasim is back to making what it knows best, and is today along with its affiliates the largest producer of viscose staple fiber (VSF) in the world. It is just as fortunate that the demand for VSF continues to surge.

Sixty four years old and hitting the high road

The company was originally coined as Gwalior Rayon Silk Manufacturing (Weaving) Company Ltd, when it was incorporated in 1947 - a point that the company does not touch upon today in its revised bio-data. (The other intriguing aside is that the inside cover page features the photographs of only the late GD Birla (who in all probability authored this company), his grandson the late Aditya Vikram Birla, and Aditya's offspring Kumar Mangalam Birla. The latter's grandfather Basant Kumar Birla, who is still alive and kicking, does not figure at all. Probably he had no hand whatsoever in the flowering of Grasim).

The company's initial footprint was apparently in textile manufacture (Grasim Suitings at a certain point) after which it diversified into viscose staple fibre and rayon grade pulp, and several other distractions that came along the way - chemicals, sponge iron, grey and white cement, and such like. At some point of time it even acquired the cement unit of Aditya Birla Nuvo Ltd (formerly known as Indian Rayon). A diversified company is the way to go was the mantra then. With a view to advertising its diversified nature, it changed its appellation to the present avatar at some point of time.

Back to its moorings

In a supreme stroke of irony the company is now almost back to its initial moorings-textiles, viscose staple fibre, and chemicals. It also makes some bye-products of minor import-caustic soda, sodium sulphate, poly aluminum chloride, etc for sale. Stick to your core competency is the current mantra. Okay there is not much textile manufacturing left under its belt - it is a mere drop in a bucket of water, but still. At some stage it also completely exited the manufacture of silk. Wonder whether the company will now script a name change back to its original! It has exited from sponge iron, and the cement division is now operating via a subsidiary, UltraTech Cement.

The company is big, real big, in the two major items on offer, viscose staple fiber and pulp which it makes directly, and in cement which it makes through the subsidiary. Today it is the only manufacturer of the former in India as the competition has shut shop, due to environmental degradation and other carping issues. As the management sees it, 'we are the world's No.1 in this sector' with the group's current capacity in excess of 744,000 tonnes. In China it has nearly doubled capacity to 70,000 tonnes. At Harihar (in Karnataka) an expansion of capacity by 36,500 tonnes will go on stream shortly. The Harihar unit will cost Rs 4.5 bn, working out to a cost of Rs 123,000 per tonne. Additionally, a 120,000 tonne plant will come up at Vilayat in Gujarat at a capital cost of Rs 17 bn, or a per tonne cost of Rs 142,000. Thus with the proposed expansions, VSF capacity will increase by almost 50% to half a million tonnes. 'Our intent is to ramp up to 1 million tonnes in the near future'. The company's capital expenditure commitments in Harihar and Vilayat and towards modernisation stand at Rs 24 bn. In 2010-11 against an installed capacity of 330,000 tonnes of VSF, it manufactured 305,000 tonnes, which is marginally higher than the preceding year.

In cement the capacity stands at 52 m tonnes following the amalgamation of Samruddhi Cement and the acquisition of the cement operations of ETA Star in UAE, Bahrain and Bangladesh. The company claims that it is the 9th largest cement manufacturer in the world. Besides, it is setting up additional capacity to the tune of 9.2 m tonnes in Chhattisgarh and Karnataka which are expected to be operational in the financial year 2014. It is also setting up additional clinkerisation plants at Chhattisgarh and Karnataka together with the grinding units. The company has earmarked a capital outlay of Rs 110 bn for this purpose.

Big ticket spending in the offing

This is indeed big ticket spending planned by the mother unit and the subsidiary. The parent should face little difficulty in finding the resources to implement its vision. At year end March 2011, it had a debt burden of Rs 8.1 bn, against an equity capital of Rs 917 m, and reserves and surplus of Rs 80 bn. It also generated cash of Rs 10 bn from operating activities in 2010-11, though against a much larger Rs 20 bn in 2009-10. (The financials of the preceding year included the operations of the erstwhile cement division). The company will of course be extra careful in dovetailing all capital expenditure programmes into the present promoter holding in the company which stands at a relatively insignificant 25.5%. The very laudable aspect here is that this perceived drawback has not frightened the management from going ahead with mega plans of its own.

UltraTech Cement however is not placed on a similar wicket. Against a year end debt of Rs 41 bn, it had investments, mostly liquid, to the tune of Rs 37 bn. But it has the advantage of being able to sponge off the parent. After all, the parent has a 60% controlling interest in it.

Viscose staple fibre and investment portfolio

As the revenue realisations go, the company is literally back to the very basics, barring of course its humungous portfolio of investments, which at year end amounted to Rs 69 bn. Of this sum, Rs 32 bn pertained to liquid investments. (The book value of the quoted investments is Rs 33.6 bn and the market value as on March 31 was a very laudable Rs 222 bn).

As per the schedule detailing the breakup of the turnover, sales of viscose staple fibre (VSF) accounted for 85% of the gross turnover of Rs 48.9 bn. The company being the No 1 in the VSF business also infers that there is an export market to be tapped - exports at Rs 8.5 bn accounted for a slice over 17% of gross sales. One however wonders what the margins are in the export sales front. Sales of rayon grade caustic soda and sodium sulphate brought in piddling sums of Rs 2.7 bn and Rs 1.7 bn respectively. Sales of manmade fibre yarns added a trifling Rs 743 m. (As a matter of fact its 100% subsidiary, Grasim Bhavani Textiles is substantially larger, recording a turnover of Rs 3.3 bn in 2010-11). But even this is a mere fly in the ointment. Other bits and ends brought in some droppings of their own.

The rupee sales are grouped under three heads of account in the business segments schedule - fiber and pulp, chemicals, and textiles. Not surprisingly almost the entire segmental profits are rolled in by the fiber and pulp division in a proportion which is skewed relative to its turnover-and partly due to its monopoly status. The textiles division is some sort of hogwash and one wonders at the efficacy of meandering on with what appears to be a millstone. The chemicals division subsists as it is a necessary corollary to its main line of business.

A crowd stopper

It is the investment portfolio however, which is the crowd stopper here. On a year-end book investment value of Rs 69 bn, the company managed the feat of obtaining a revenue return of Rs 2 bn. This excludes the Rs 344 m that it earned as profit on sale of investments. Not exactly what the investment manager ordered but that is the reality of the situation. Of this lot, investments in liquid debt instruments accounted for Rs 32.4 bn, while the investment in UltraTech Cement accounted for another Rs 26.4 bn. The two investments together add up to Rs 58.8 bn, or 85% of all investments.

The list of investments includes 16 subsidiaries, seven joint ventures, two associates, and a medley of other investments spread across Thailand, Philippines, Indonesia, Isle of Man, Egypt and such like, which are classified under trade investments/other investments. There is very little financial interaction between the parent and its many siblings.(The next annual report will include one more holding company, Aditya Holdings AB, Sweden which acquired Domsjo Fabriker AB of Sweden-a wood pulp maker for viscose staple fibre). Grasim holds only a 1/3rd share in Aditya Holding for whatever reason. Who holds the balance 2/3rds please?

It is a junior partner in the five JVs whose year-end financials it has appended. They include two companies based out of Canada, one in China, one in Laos and one in mera Bharat. Why has it chosen to be the junior partner in all five ventures? Who owns the balance stake? It has provided the briefest possible financial details of the five JVs on offer (there are altogether seven JVs--two were incorporated during the year). And what little they have to reveal is of a very uncomplimentary nature. Two of the four which possess any revenues have their bottom lines laced in red ink. None of them appear to have paid out any dividend. Why companies bother to even provide such ridiculously perfunctory details of their siblings' beats me all ends up.

Some of the 16 subsidiaries comprise of floozies. Only two of the sixteen have declared a dividend in 2010-11. The six Middle Eastern based cement companies acquired from ETA Star are collectively big on the turnover front - Rs 10 bn, but drummed up a cumulative loss of Rs 370 m. It has also acquired a power company from ETA Star going by the name of Emirates Power but based out of Bangladesh. The holding company of these entities - UltraTech Cement Middle East Investment Ltd-- has a paid up equity of Rs 1.9 bn, total liabilities of the value of Rs 5.4 bn, and guess what, total assets of Rs 2 m!

There are another five cement companies including three operating under the UltraTech brand. The parent UltraTech Cement and Samruddhi Cement are the two big ticket businesses in the subsidiary list, with revenues of Rs 132 bn and Rs 22 bn respectively.

And what of the performance parameters of such exotica as Thai Rayon Public Company, PT Indo Bharat Rayon Company, Alexandria Carbon, Indophil Textiles, Thai Carbon Black Public Company, Birla International etc? There is no mention whatsoever of how these companies are faring. It will help if India Inc gave a little more thought on profiling adequate financial data on companies classified under 'Trade Investments'.

The future perfect

In spite of such aberrations, this is one company which is on a roll. More so since it is back to its focused ways, sells cash down, has minisule gearing, and is the leader in the industry that it knows best. Besides, this is not a line of business that attracts any competition given the 'maha' environmental concerns that this industry attracts. The only issue then is whether it has got its reading of the market potential right. For the present, the company is betting that it is indeed on the right road. Its other side attraction, namely cement, is on a very firm foundation too.

Disclosure: I hold 134 shares in Grasim Industries

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

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