1. Motilal Oswal rates Grasim Industry ‘Neutral’, says Holdco discount to stay at elevated levels

Motilal Oswal rates Grasim Industry ‘Neutral’, says Holdco discount to stay at elevated levels

Company investments in Ultratech and ABCL valued at 40% discount; at Rs 1,384/share, there’s limited upside of 9%

By: | Published: July 25, 2017 3:54 AM
Record date for Grasim’s shareholders to be entitled for 7 shares of ABCL (Aditya Birla Capital Ltd) for every 5 shares of Grasim is 20th July, implying ex-date to be 18th July.

Record date for Grasim’s shareholders to be entitled for 7 shares of ABCL (Aditya Birla Capital Ltd) for every 5 shares of Grasim is 20th July, implying ex-date to be 18th July. Grasim shares from 18th July will trade ex of ABCL share value of ~ Rs 204/share which is benchmarked to recent transaction value of Rs 313 bn of Premji Investments (PI). We ascribe 40% discount to Grasim holdings of Ultratech and ABCL which is similar to long term average of holdco discount being ascribed to Grasim’s holding in Ultratech. We arrive at fair value of Grasim at Rs 1,384/share valuing holding in Ultratech and ABCL at present market cap and transaction value of Premji Investments respectively. Maintain Neutral. Grasim’s shares to trade at ex of ABCL share value from 18th July: Grasim post the merger with ABNUVO holds 57% stake in ABCL.

Additionally shareholders of Grasim are also entitled for 7 shares of ABCL for every 5 shares of Grasim held with record date being 20th July 2017 for the same (implying ex-date to be 18th July). Hence we expect Grasim shares on 18th July 2017 to trade lower by Rs 204/share. This value of ~Rs 204/share ascribed to ABCL shares is benchmarked to recent investment by Premji Investments for 2.2% stake in ABCL, thus valuing it at Rs 313 bn (pre money). PI invests 2.2% in ABCL at valuation of Rs 313 bn (premoney): Premji Investments in a recent transaction has entered into definitive share subscription agreement (SSA) to invest Rs 7.03 bn in Aditya Birla Capital for 48.4 million shares thus valuing the entity at Rs 320 bn (post money) and Rs 313 bn (pre money). The transaction translates into per share value of Rs 145/share for ABCL.

Expect long term holding discount to remain at elevated levels; see limited upside: Grasim’s long term holding discount to its investment in Ultratech has been ~40-45%. We expect this long term holding discount to exist for Grasim’s 60%/57% holding in Ultratech and ABCL respectively. Hence we value investments in Ultratech (at current market price) and ABCL (value benchmarked to PI Investments at Rs 313 bn) at 40% discount and investments in other group companies at ~50% discount to present market value. We thus arrive at fair value of Rs 1,384/share implying 9% upside from present levels. Maintain Neutral.

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