Grasim seen adding Rs 100 cr to bottomline via acquisition

Our Corporate Bureau

Mumbai, Nov 19: Cement industry analysts appeared divided on Monday on the Grasim Industries Ltd buying the Reliance Industries Ltd 10 per cent stake in Larsen & Toubro. The AV Birla group has acquired the stake at Rs 306.60 per share, a 47 per cent premium over L&T’s last traded price of Rs 208.50.

Meanwhile, Grasim Industries is said to have contacted L&T as per legal requirements on various issues including board representation. However, it is not clear as to how many members on the L&T board will be represented by Grasim.

Analysts said, Grasim, with its toe-hold in L&T, would be able to add around Rs 80-100 crore in its profitability during the next one year, others felt the high premium acquisition is a bit of drag on its profitability. The addition to Grasim’s bottomline, analysts said would be possible because of the sheer pricing power and possible co-marketing arrangement between the two majors -- Grasim and L&T. The company had reported a net profit of Rs 377.9 crore in the year ended March 31, 2001.

Further, a section of analysts said that this was a fair deal for Grasim Industries, others said it was an expensive deal wherein it paid a hefty 47 per cent premium for the 10 per cent stake in L&T. Grasim is seen leveraging the cement markets where L&T is strong and vice-versa, and utilise best practices in product initiatives, manufacturing and marketing towards a win-win situation.

Said an analyst from CLSA: "While we understand that L&T is a strategic fit to Grasim’s cement ambitions, the premium comes as a surprise. We believe Grasim’s immediate cash outflow of Rs 7.66 billion will strain its capital efficiency. We are downgrading Grasim’s FY02-03 earnings by 6-11 per cent and we expect the stock to derate, as concerns of further cash investments in hiking the stake continue to irritate. The cement sector will gain from this consolidation, but Grasim will now underperform its peers and we downgrade it to Underperform."

While top Birla group officials have pointed out that the funding of the stake will be through internal accruals and partly short-term debt, a quick snapshot analysis reveals that Grasim would not be impacted much even if it went wholly through the debt route, analysts pointed out. Analysts added that at 11 per cent interest rate for a 12 month period, the interest outgo would be Rs 84 crore even if it went for debt funding. Even if dispatches stand at 8 mn tn for the year, to neutralise the impact of this investment, Grasim will have to sell cement at Rs 105 per tonne which would entail an increase of Rs 5 per bag.