Cementing cartel

Manish Joshi & Prashant Kothari

Grasim has bought 10 per cent stake in L&T from RIL in a negotiated deal valued at Rs 767 crore. Like any other structured deal, the price paid per share of Rs 306.5 per share is 47 per cent higher than the prevailing market price. It may be recalled that even GACL had paid a price of Rs 370 per share for ACC when the stock was trading at Rs 130.

Grasim’s initiative assumes significance as the cement cartel was reportedly showing signs of weakening. Grasim-L&T combine along with ACC-GACL now controls over 50 per cent of the total capacity, leading to further consolidation in the cement industry.

As a result, the cement cartel can now have better control over price, even as the industry continues to suffer from overcapacity. However, apart from that, there is nothing to be excited about the deal for the shareholders of Grasim and RIL.

As long as an open offer, that may involve outgo in excess of Rs 1,500 crore, is not made, Grasim will show the payment Rs 767 crore as long-term investment in its balance sheet.

The investment may fetch a meagre dividend yield of around 2-3 per cent. Once Grasim’s stake in L&T crosses 20 per cent, it will have to consolidate accounts of associates as per AS - 23 under ‘equity method’. This may spur Grasim’s bottomline to some extent.

RIL has earned capital gain of Rs 360 crore, which will be reflected in its third quarter results. However, a possibility of special dividend is largely ruled out as the company may use the cashflow to retire its high cost debt or to invest in the Reliance Infocom project.

It makes little sense for Grasim to stay with just 10 per cent stake in L&T, as it will not have much say in the management. Hence, there are expectations that the Grasim will make an open offer despite denials from the company to that effect.

The company has got strong financials and a relatively low debt-equity ratio of 0.66:1 that may allow it to go for debt to finance an open offer. If Grasim acquires control over the L&T management in future, then it will succeed in restricting entry of any foreign player in L&T’s cement business irrespective of demerger.

Henkel Spic
Henkel Spic, with strong support from its German parent, is making significant inroads in the Indian detergent market.

The company reported a huge 15 per cent growth in operating income to Rs 82 crore for the quarter to September 2001, at a time when most of its competitors are reeling under pressure and reporting stagnant growth.

This figure does not include the operating income of Calcutta Chemicals (CC) in which the company has a 92 per cent stake. CC had reported a turnover of Rs 63 crore for the year to March 2001.
Margo, the biggest brand of Calcutta Chemicals has reportedly grown at 20 per cent in the six months to June, 2001. This brand has now been extended to talcum powder, while plans to extend it to skincare products is in the pipeline.

Around 70 per cent of Henkel’s operating income is contributed by detergents while soaps and cleansers contribute the balance. The important brands in the company’s kitty include Henko Megastar, Henko Stain Champion Powder, Mr White, Fa and Pril. There is good news on the operating profit front as well. The operating profit has zoomed by 66 per cent to Rs 5 crore in this quarter.

This phenomenal jump has come on the back of a strict control on raw material consumption, which was up only 5 per cent to Rs 43.5 crore. The operating profit margin, although very low at around 6 per cent has been steadily rising from around 4 per cent in the corresponding quarter. The net profit, on similar lines, has also risen sharply to Rs 2 crore while the net profit margin stood at 2.5 per cent.

Henkel has been fast expanding its distribution network in the western and northern markets, where it did not have a stronghold before. This will boost the operating income in the future. However, an increase in the operating margin may take some time to come, as the company would have to adopt lower pricing strategies in the initial years to make its products popular.