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Grasim Industries’ agreement with the Welspun group to sell its sponge iron unit for a consideration of Rs 1,030 crore may help part-fund its expansion plans and lend support to its operating profit margin, as the sponge iron division has been a drag on the company’s overall performance since 2005-06.

The proceeds from the sale consideration are expected to be utilised towards the company’s capacity expansion plans (in cement and viscose stable fibre (VSF)). These are expected to absorb an outlay of Rs 2,946 crore over FY-09 and FY-10. The proceeds of this sale may reduce Grasim’s dependence on debt funds to a significant extent.

The sponge iron division has been witnessing decline in sales and realisation due to higher input (pellets, natural gas, naptha, propane and iron ore) prices and subsequent lower capacity utilisation since 2005-06. Sales volume of sponge iron declined by 2 per cent year-on-year and 18 per cent quarter-on-quarter in March 2008. Sponge iron contributes just 3.3 per cent of the total sales turnover as of March 2008. The move to hive-off the non-core business may enable better focus on the core businesses of cement and VSF.

More Stories on : Steel | Restructuring | Stocks | Grasim Industries Ltd

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