Grasim Industries: Hold/Buy on declines

Recommendation: Hold/Buy on declines

S. Vaidya Nathan

Grasim Industries' shareholders may continue to stay invested since the in-the-pipeline restructuring exercises may hold scope for unlocking some value.

With the broad markets still showing a downward bias and the slowdown in the economy likely to dampen the performance of core sector companies, the Grasim Industries stock could also see some price weakness from the present levels. Any such decline could be used as an opportunity by long-term investors to pick up small exposures in the stock.

Suitability: The Grasim Industries' stock is only appropriate for investors with an above-average appetite for risk. Investors should track the stock closely and the investment has to be backed by a clear move to review the position after the stock posts any significant gains. Since it is of a cyclical nature, a buy-and-hold strategy may not deliver value if the experience of the last few years is anything to go by. This is true for all economically-sensitive stocks.

Business profile: Grasim Industries is in the throes of a restructuring. The company's efforts so far have largely focussed on its cement business. Given the manner in which the industry structure has unfolded in the last three years, this appears to have been the right thrust, as otherwise the company may have been left behind in a rapidly-changing scenario.

Through a series of acquisitions -- from Shri Digvijay Cement, Dharani Cement and Indian Rayon -- Grasim Industries has emerged with a capacity of close to 10 million tonnes and one of six players that controls close to 45 per cent of the installed capacity in the industry.

By taking the acquisition route, Grasim Industries has improved its geographical profile. Till these deals were done, the company had a presence only in Madhya Pradesh and catered largely to the northern and eastern markets. But, now, it has a profile which covers the southern and western markets as well. This should augur well at a time when profitability in the industry is under pressure, as companies are forced to absorb cost increases in a competitive milieu.

The company's viscose staple fibre business continues to be a cash cow, though the company no longer enjoys the kind of pricing power it used to do for much of the 1990s. Grasim is virtually a monopoly in VSF, but it is the threat from alternative products that is keeping a leash on profitability. The sponge iron business' operational profile has improved, but it is clearly one that is waiting to be sold. It may be a matter of time because the steel business plans are now clearly on the backburner.

Much of the focus may well be on Grasim's retail business where it enjoys good brand equity but is faced with rising competition. And it is this business which could be a key part in any future restructuring exercise. With the sister concern, Indian Rayon, picking up Madura Garments with a set of well-known brands, a greater degree of coherence in this line of business may help both the companies.

A restructuring that brings the two together to offer a wider set of brands without duplicating cost-structures may be on the cards. Since Grasim is the flagship company of the group, it is likely that any restructuring would be carried out in a manner that benefits its shareholders.

As far its financials are concerned, Grasim Industries has performed better than most diversified companies and that too despite a big presence in cement where the profitability has not been good. As a emerging restructuring story, the Grasim Industries' stock can be held on to by existing shareholders though it is unlikely to command the kind of fancy valuations it did in the mid-1990s.