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S. Vaidya Nathan

Mr Kumar Mangalam Birla, Chairman, the Aditya Birla Group... Prologue to the restructuring story.

SHAREHOLDERS can retain their exposures despite the almost three-fold jump in the stock price this year. Fresh exposures can be considered on price declines, especially on any weakness linked to the broad market.

Business Line had given `buy' recommendation on the Grasim stock, with the last one at Rs 455 in June 2003. It continues to be optimistic about the company's growth prospects, especially over a two-three-year period when its acquisitions — which have put it at the top of the capacity table in cement — and improved pricing power of cement producers, should bolster its already impressive earnings card.

Restructuring likely: The presence in cement is now spread across different companies — Grasim with its 13-million-tonne capacity; the new company (CemCo) to be formed for Larsen & Toubro's (L&T) 15-million-tonne capacity; Dharani Cement and Shree Digvijay Cement. There is also an overlap with the group company, Indian Rayon, in the fabric and fibre business space.

In this backdrop, there is no denying that restructuring is likely to create better focus. It can unlock value as the terms are bound to be favourable for Grasim. But the process itself is unlikely to happen before the latter part of FY 05, as the formalities relating to the acquisition of L&T's cement business are yet to be completed.

Revised terms unlikely: The L&T stock has doubled since the terms of the cement business demerger and shuffling of the stakes in the engineering business was unveiled.

Despite this spurt, it is likely that the compromise deal between Grasim and L&T will go through without any revision of prices.

There is vested interest on both sides to stay clear of any change. The uptrend in the L&T stock was driven largely by the engineering and construction business.

Grasim is set to sell a 15 per cent stake at Rs 120 per share to an employee's trust of L&T. The opportunity loss is bound to be stiff. But Grasim would prefer to skip this aspect as its focus is on adding the L&T strength in cement to its business card. The stake vested in the employee's trust gives L&T's professional management a cushion against the threat of acquisition. So, L&T too is unlikely to demand a revision of the open offer price of Rs 171.3 per share of CemCo.

Stronger balance-sheet: A combination of good earnings growth in the first six months of FY 04, cash flows from the sale of its stake in group company, Indo Gulf, and further fine-tuning of the debt profile have added sheen to Grasim's financials.

On a conservative basis, it appears set to close FY 04 with sustainable post-tax earnings of about Rs 600 crore and cash profits of Rs 900 crore. This should enable it handle the debt burden of about Rs 1,500 crore that will come as part of L&T's cement business even more comfortably than was the case six months ago. As this burden is tackled on a fast-track mode, Grasim may be able to pursue further acquisitions to ramp up its cement business.

A firm undertone: Despite a decline in cement price levels, Grasim has managed to report profits for its cement business in the traditionally weak July-September quarter.

Over the next couple of quarters, the cement business is likely to be more earnings accretive as prices improve steadily. Volume growth, too, beckons following the good monsoon. This year, the sponge iron business is set to turn its best-ever showing as steel prices continue to be firm. Good as the going is now, it is this business that would pose a risk if the steel story takes an unfavourable twist — though that appears unlikely over the next three-to-four quarters.

Terms of the deal

IT IS six months since the restructuring of Larsen & Toubro's (L&T) businesses was unveiled, with Grasim picking up its cement business.

Even as the deal is still under implementation, a look at their prospects in the accompanying stories. The key terms of the deal are:

Stories in this Section
Construction: Building on

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