Grasim: more berated than re-rated

Grasim: more berated than re-rated
Published: 22 June 2010

The company has a strong record of profitability and growth, and its focused approach is expected to yield better results.

Come July 1, and another chapter will be added in the annals of Grasim’s history. Overall, the share price saw some beating since May, when the cement business was demerged from Grasim into Samruddhi Cement. Shareholders get one share in Samruddhi for every share of Grasim. Later, Samruddhi would be merged into Ultratech with a share-swap ratio of 4:7, that is, four shares of Ultratech for every seven shares of Samruddhi.

After the restructuring, Grasim will own 60.3 per cent in Ultratech on July 1. This would also be a moment of reckoning for the company. Now the company would be directly relying on viscose staple fibre (VSF), in which it is a global player. The VSF division reported revenues of Rs 1,040 crore, which was 64 per cent more than that recorded in the previous year and had a 231 per cent jump in operating profit to log Rs 360 crore in the March quarter.

It managed to push its profit margin back to the 35 per cent level from the 10 per cent level in the December 2009 quarter. Also, Grasim’s stake in Ultratech would give it the status of a holding company. This would enable it to enjoy the benefit of being India’s single-largest cement company by the end of 2010, with a capacity of 48.8Mta. ACC would be a distant second player with 27.6 Mta capacity.

The merger of Ultratech with Samruddhi would also make the resultant entity the tenth largest cement manufacturer in the world. Hence, the current price is seen as a steep discount to valuations impacted by investor apathy. Analysts point out that Grasim’s average operating margin for the past five years has been 26 per cent and they expect it to improve to around 29 per cent. And, though cement earnings will not be reflected as a part of Grasim’s standalone performance, analysts have factored in 20 per cent growth in net earnings.

The return on invested capital for Grasim has been strong at around 22 per cent — more than the industry average and the 15 per cent level which analysts consider to be decent, considering the cost of capital. And, while the VSF business will be fraught with risks, the company is expected to have more focus in building the cement business in Ultratech. So, the market’s harsh reaction could change and be in line with other holding companies.