Getty ImagesThis discount, however, will reduce as both the parent company as well as its subsidiaries have been doing well.

Once again, Grasim Industries’ quarterly results surpassed market expectations. The company’s standalone revenue and net profit for the third quarter zoomed 21% and 28%, respectively, year-on-year (y-o-y). Though there was a small fall in the margin of its viscose staple fibre (VSF) segment, it was offset by the steady performance of its caustic soda segment and the recovery in its textile segment.

Along with its group companies, Grasim enjoys a 17% share in the global VSF market. To strengthen its position further, Grasim is now looking to expand its capacity by 50%. Since domestic and global VSF demand continues to be robust, this capacity expansion should play out in Grasim’s favour. The company’s VSF monopoly in India, slower capacity additions by other global VSF majors due to environmental concerns, better margins due to backward integration, introduction of value-added VSF products, etc., are the other factors in favour of Grasim.

The company is also increasing the capacity of its chemicals segment. This is a step towards strengthening backward integration because Grasim’s VSF segment is a major consumer of caustic soda. The capacity expansion in the VSF and chemical segments will involve an outlay of around Rs 7,600 crore over the next three years. But it will not lead to any financial stress for Grasim because all its three segments have been generating free cash flows.

Analysts’ views

Hold 2

Buy 12

In addition to its standalone businesses, the company’s subsidiaries have also been doing well. For instance, its Ultratech Cements—Grasim holds 60.3% in it—and Aditya Birla Capital—Grasim stake is 56%—continue to do well. With most cement companies increasing prices by `25-50 per 50 kg bag in recent months, cement companies are expected to report better numbers in the coming quarters. The concerns about Grasim’s loss-making subsidiary, Idea, have also been allayed due to its recent merger with Vodafone— the merger has restricted Grasim’s stake in Idea to 11.55%. As its standalone business as well as subsidiaries are doing well, analysts feel that the holding company discount, of around 45%, particularly considering the performance of its standalone business, is not justified.

This discount is likely to come down in the coming years. The deep cut in valuation in the past year was because of capital allocation concerns with respect to Idea. But, as Grasim’s holding in the merged entity, Vodafone-Idea, is just 11.55%, any infusion of capital will now be in proportion to Grasim’s reduced take and won’t bring its balance sheet under stress.

Grasim compared with Sensex and ET Textiles Index. Stock price and index values normalised to a base of 100. SOURCE: ETIG & BLOOMBERG.

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