10 Jun 2014
Grasim's valuation gap with UltraTech gives it room for appreciation
The attractive gap in valuations of holding company Grasim Industries and its subsidiary, UltraTech Cement, has caught the eye of investors. This resulted in a gain of more than 11 per cent in Grasim's share price on Monday, the highest single-day percentage gain over the past five years.
While UltraTech is valued at $195 per tonne, the implied valuation of Grasim stands at $110 per tonne, a discount of about 43 per cent for the value it has derived from UltraTech's cement assets.
Analysts believe that the expectation of improvement in cement utilisation from the current 70 per cent in the next 2-3 years will trigger another leg of rerating of cement stocks. This could possibly narrow down the valuation gap between Grasim and its 60 per cent-owned subsidiary UltraTech.
Goldman Sachs, in a report on cement industry on May 25, said, "We believe the current structure of Grasim was created in June 2010 and was not there in the previous upcycle (FY04-08). Hence, the holding co history of the last four years is not reflective of the holding company discount that would prevail in an upcycle."
The report added, "We believe this current discount should significantly narrow in the upcycle. We see no reason for such a large holding company discount." Second, analysts expect increasing contribution of Grasim's Viscose Staple Fibre (VSF) segment. VSF is used as a raw material in garments and home textiles.
In coming quarters, VSF prices are expected to gradually move up as the industry is going through its lowest in the business cycle. With the contribution of Grasim's VSF business going up, analysts expect easing of pressure of the valuation gap between Grasim and its subsidiary. A CLSA report on Grasim Industries on June 8 highlighted improvement in Grasim's VSF segment.
"Grasim's cement (69 per cent of FY14 Ebidta) should be a beneficiary of a pick-up in the industry utilisation rates driven by receding capacity surpluses, along with an expected demand pick-up. This should drive a strong earnings growth for its 60 per cent-sub-UltraTech," the report said, adding, "We believe that VSF profitability is also at the trough and is building in a steady rise over the next three years. After a 20 per cent yoy decline, we expect Grasim to report a 24 per cent CAGR in EPS over FY14-17."