Grasim Industries: Hold through to restructuring

Recommendation: Hold through to restructuring

S. Vaidya Nathan

THE GRASIM Industries stock valuation has sharply bounced back in the last three months.

The stock is now comfortably past the Rs 300-mark, having gained close to 82 per cent in this period. The sharp spurt may have some more steam left and as such upside potential exists.

The company may report a fairly impressive earnings card for the October-December 2000 quarter. Even in the preceding two quarters when the cement prices were sluggish, Grasim was one of the few diversified companies to show a decent performance. In the last quarter, cement prices have been high (though of an unsustainable nature too) across all markets.

Though volumes may be lower, on balance, the company may have better earnings to report. There could be some upside in the homestretch to the earnings announcement. The stock may also be driven up by more institutional investor interest. This factor has been the prime reason for the sharp re-rating of the stock.

The stock appears to have emerged as a strongly preferred exposure among the Old Economy companies. But once the stock touches the Rs 400-450 levels, it could well flatten out pending restructuring announcements.

Generally such institutional investor-driven trends tend to compress the upside or downside (depending on buy or sell) in a short span and that appears to be taking place in the Grasim stock. This is one reason why it may flatten out sooner than later. Though the recent uptrend and subsequent flattening may be a tempting time to take profits, there is the restructuring element that could alter the valuation dynamics altogether.

The stock had started 2000 at around Rs 440 and any restructuring exercise could lift valuation levels higher. The group appears to be clearly heading towards vesting its ready-made garments and fabric businesses under one roof. It is now more a question of time than whether the group would go ahead with such an exercise.

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Indian Rayon, its sister concern, has a slew of good brands in ready-made garments such as Louis Phillipe, Van Heusen, Peter England and Byford among others. These are already on the roads grouped prominently under the Grasim (which also has a considerable brand equity) umbrella. A clear pointer to the restructuring that lies ahead is evident in the shopping malls.

It would also be in line with the long term strategy to operate the fabrics/fibres and cement as well focussed entities. While the cement part is done and now under the auspices of Grasim, the former is still due. In both these businesses, the group has a good competitive edge. The sale of the sponge iron business may, however, take more time.

If a full-fledged restructuring is initiated, this particular business may be vested in a separate entity pending its sale. The company has also vested the software and consultancy business, Birla Consultancy Services, in a separate company which is a subsidiary of Grasim.

As far as its financials are concerned, the company is quite comfortably placed and has the wherewithal to raise equity and/or debt easily should the need arise. The internal cash generation may also be a source of strength. The one risk factor that stands out as any restructuring goes is the manner of distribution of ownership claims.

If this is handled satisfactorily, the overall restructuring due to be completed may unlock some value that is not priced in yet. In this backdrop, existing shareholders can stay invested in the Grasim stock, the recent spurt notwithstanding.