The merger of Samruddhi (the cement unit of Grasim) with UltraTech will create India’s largest cement capacity with 49 million tonnes. It is seen as a positive development for Grasim as well, which will be 60% owner of the post-merger UltraTech as well. But the earnings visibility, in terms of operations, is expected to emanate from the viscose staple fibre (VSF) business, reckon analysts. Post the demerger of the cement business, the new stand-alone entity would have net cash to the tune of Rs1,500 crore, and with the VSF business on a steady state, should be able to generate Rs 700 to Rs 900 billion of operating profits per year, say analysts at JP Morgan.
With the prices of VSF going through the roof, the company might well be able to beat these estimates. Prices of VSF have crossed the Rs 115 per kg mark and experts in the trade reckon that they could even touch Rs 145 per kg by December end and remain strong in the year ahead as well. Acute shortage of cotton and the subsequent demand for VSF has caused prices to rise. Cotton prices have been on the rise, especially in China, which accounts for 50% of the world’s VSF output. This, in turn, has pushed the prices of VSF higher as there is the substitution effect wherein VSF and cotton are used interchangeably with polyester staple fibre (PSF) as blending material. This would benefit Grasim as it is the second-largest producer of VSF in the world, with 75% backward integration into pulp. For 2008-09, the company had generated revenues worth Rs 2,335 crore from the VSF division with an average realisation of Rs 95.6 per kg.
The same division had generated an operating profit of around Rs 516 crore with margins of around 20.4%. With prices rising steadily, analysts expect it to generate operating profits in excess of Rs 1,000 crore as in the year 2007-08, when it had average realisations of Rs 103 per kg. The share price has climbed up by 13% since the beginning of November 2009 till date.