The Hindu Business Line : Grasim: Buy

GRASIM (Rs 1,575) appears to be an attractive investment option in the large-cap space. Investors can buy this stock with a one to two-year perspective. Its cement business appears poised for robust growth, as there is better pricing power across different markets. Grasim is also unlikely to face a capacity constraint over the next couple of years.

We also expect the company to be active in the acquisitions space, as it seeks to expand market share without adding to the supply side in key markets. Its financials are in excellent shape and it has considerable latitude to bankroll acquisitions with debt and cash flows from operation and without recourse to equity. This remains a key strength as it expands its business.

Pricing pressures may ease in its viscose staple fibre business, as cotton prices have started to exhibit a firm undertone. Its sponge iron business is likely to act as a drag on earnings, as pricing and input cost pressures have dampened the outlook. The worst phase is, however, over, though improvement is likely to be gradual and this business is unlikely to contribute to earnings in the manner it did in FY05. This aspect is, however, priced in at current valuation levels.

UltraTech Cement — a company in which Grasim holds a controlling stake — has also started to show an improvement in operating efficiencies apart from benefiting from the rise in cement prices. There is also the likelihood that a consolidation of cement operations of Grasim, Shree Digvijay Cement and UltraTech Cement may be pursued over the next year or two.

This will provide benefits of synergy and lead to lower costs in areas such as procurement, logistics and marketing. Such an exercise has the potential to unlock value for shareholders. We have, however, not factored gains on this score in our recommendation. With Holcim of Switzerland gaining a stranglehold with its acquisition of ACC last year and Gujarat Ambuja Cements a couple of weeks ago, Grasim may hasten the consolidation of its cement businesses under one umbrella.

The principal risk to our recommendation is a slide in cement prices due to an unexpected slump in demand.

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