Grasim Industries: Hold

Recommendation: Hold

S. Vaidya Nathan

GRASIM Industries may be hard-pressed to maintain the kind of growth rates it managed in 2000-01 as cement prices may not be sustained at the levels that prevailed in this period.

But as a company that has a strong presence in the business and is set for more restructuring, shareholders may be better off staying invested.

A 62 per cent growth in post-tax earnings was possible in the January-March 2001 quarter. Notably in this quarter, cement prices were on a high and sponge iron prices firmer. This improved the bottomline with the operating profit margin improving close to 5 percentage points.

The importance of the last quarter in lifting the overall show can also be gauged from the fact that the OPM for the full year rose barely by a percentage point. For the year, the following are the significant aspects of the performance:

* There was a 12.8 per cent rise in turnover to Rs 4,839.74 crore while costs moved up 11.5 per cent. The fact that sales growth was just 12 per cent at a time when prices across its various products were firm and can be attributed to lower volumes in cement. The numbers raise questions about the sustainability of the profitability levels. Since the cement business is essentially a volumes game, lower price could cut into profits.

* The company managed to keep its costs in check despite a hike in the price of administered inputs. This helped in a year when there was pressure on volumes.

* The company appears to have managed its finances well and was also helped by a lower interest rate environment. Interest costs fell 6.7 per cent in absolute terms and even more when seen in relation to the scale of operations. With depreciation charges also remaining flat and `other income' rising by 26 per cent, the company managed a 62 per cent rise in post-tax earnings.

* The company reported sales of Rs 4,839.74 crore (Rs 4,289.72 crore in 1999-2000) and earnings of Rs 377.9 crore (Rs 233.1 crore).

* The per share earnings on an equity base of Rs 91.69 crore is Rs 41.21 (Rs 25.42).

To some extent, the performance was better than what is indicated by the numbers, since Birla Consultancy Services (entailing some dent to revenue) was transferred and Dharani Cements merged with the company (involving more financial charges by way of depreciation and interest).

What is in store: Grasim Industries has indicated plans to strengthen its cement capacity by 3.3 million tonnes, partly by modifying its product mix. A greater tilt towards ready mix concrete is likely. This capacity hike would place Grasim at the top in terms of capacity league in the industry.

This also indicates that cement would grow under the Grasim umbrella. It is also Increasingly becoming clear that as cement grows into a major business, further restructuring is inevitable. This may have two core aspects. The sponge iron business may continue to be on the chopping block as it is difficult to see how it would fit in with the group's plans.

This business has been weighing on the profitability and with some improvement in the price levels, the division may also have the potential to fetch a better price. But this would be an expected move.

The second, and more important, aspect may be the prospective changes involving the garment/fabric business which is now spread over Grasim and Indian Rayon. Business strategy, the need to have better focus and the signs on the street where Grasim has embraced the brands held by Indian Rayon suggest a restructuring sooner than later.

This could lead to better valuation of the businesses of the two companies. In this backdrop, shareholders can stay invested. The stock trades at a price earnings multiple of around eight times its historical earnings. Though this may seem to be on the low side, the sustainability of the 2000-2001 earnings levels have to be considered as an uncertain factor. Fresh exposures in small lots may be considered on declines in the latter part of the year.