S. Vaidya Nathan
Corporate Bureau
Business Line
22 August 2004

Investors with a one to two-year perspective may consider exposures in the stock of Grasim Industries at the price of Rs 1,077, as the boom in commodity prices is likely to spur earnings growth.

Any decline linked to weakness in the broad market can be used to add exposures. The stock trades at price earnings multiple of less than 10 times its likely earnings over the next couple of years.

This recommendation represents continuity in our bullish view on the Grasim stock. We have maintained a buy stance on the stock for a few years now. In 2003, our buy recommendations were at prices between Rs 350 and Rs 870. There has been a substantial re-rating of the stock over the past 21 months; there is, however, room for further gains.

The risks to our recommendation are the macro-effect of the surge in crude prices and any delay beyond two years in the emergence of a better balance between demand and supply in the cement industry. The spurt in earnings from the sponge iron business may also not be of a sustainable nature across several years. It would, however, offer a fillip to at least the FY 2005 earnings.

Grasim is now the largest player in the cement industry, with a capacity of 32 million tonnes, a footprint across the country and a brand equity that confers considerable advantage. The merger of UltraTech Cement, which holds the cement business acquired from Larsen & Toubro, is a formality. Gains from this development are largely priced in; there could be upside at the time of the merger, especially if it is accompanied by restructuring that leads to a focussed cement play.

Grasim is also well placed to pursue further capacity expansion in cement through acquisitions and by setting up new units. Its strength in distribution would ensure that marketing additional volumes would not be a problem. This has been evident over the past two years, as it has outperformed the industry.

The profitability of its VSF business — in which it is a monopoly — is likely to be better as prices have been increased this fiscal. The cloud over the VSF business imposed by poor rainfall a month ago has also lifted, courtesy the revival in the monsoon. A strong balance sheet with the potential to raise equity and debt at attractive prices is a strength that remains undiluted.