S. Vaidya Nathan
22 August 2004
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.
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.
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.
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.
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.
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
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.