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Grasim: A concrete bet

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Business India
08 November 2016

For those optimistic about India's growth story, taking an exposure to cement stocks is a must. Growth in investment demand cannot but be accomplished without growth in economy-sensitive industries like cement, aluminium and steel. While the latter two are also to some extent influenced by global market movements, cement is largely a local play.

UltraTech is the biggest player in this sector, with a current capacity of 69 million tpa, which is expected to rise to 91 million tpa after its merger with Jaypee Cement, which will help shore roughly 17 per cent of the country's capacity. It also has 3 million tpa capacity overseas. Grasim, the parent company of UltraTech, holds close to 61 per cent of the shares in UltraTech. Besides cement, which accounts for almost two-thirds of the company's turnover, Grasim is into chemicals and fibres too, which account for the balance 30 per cent of the turnover. With cement companies on a roll, Grasim has been a consistent performer, with impressive EBIDTA and PAT posted year after year.

Cement being a volume game, the additional contribution of UltraTech will also boost profits in the coming years. Unlike UltraTech, which is available at a P/E of 41, Grasim is available at a P/E of 17.07, which is the lowest in the industry. Shree Cement is available at a P/E of over 62 and Ambuja Cement has a P/E of 51x. Even after taking conglomerate discount into account, Grasim still looks the most inexpensive cement share.
The added attraction for Grasim is the proposed merger of Aditya Birla Nuvo to it. For every 10 shares of ABNL, the shareholders will now get 15 shares of Grasim. Besides ABNL, Grasim also has Aditya Birla Financial Services under its umbrella. ABFS is a profit-making NBFC, with a mutual fund, a majority stake in life insurance, a fledging housing finance company, as also broking, private equity and wealth management businesses. This NBFC is proposed to be listed immediately after the merger goes through. It has been proposed that shareholders of Grasim will get seven shares of Aditya Birla Finance for every five shares of Grasim. The finance company has a book of Rs 30,000 crore, with an EBIDTA of Rs 4,000 crore. It has a life insurance business and a mutual fund in its fold.

Given the attraction of any well-run NBFC, it may not be surprising to see this finance company also becoming another feather in the cap for Grasim. The closest parallel to this NBFC would be Bajaj Finance, except that, in this case, the life insurance business will be with Aditya Birla Finance Co, while in the case of Bajaj Finance, the insurance companies are with Bajaj Finserve. Aditya Birla also has a payment bank licence.

After the merger, Grasim will have a 57 per cent stake in Aditya Birla Finance, 60 per cent stake in cement, as also a 51 per cent stake in the solar business, plus an investment of 28 per cent in Idea Cellular, 11 per cent stake in Aditya Birla Fashion & Retail and a 4 per cent stake in Hindalco. Other divisions will be textiles, chemicals and insulators.

Essentially, shareholders of Grasim will have exposure to cement, finance, telecom, solar energy, as well as textile divisions - a conglomerate in the true sense.

For investors willing to take risks, it makes sense to buy Aditya Birla Nuvo to get a stake in Grasim at this stage and get a Diwali discount of Rs 80 per share of Grasim at the current rate.

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