Why is Dalal Street so upbeat about this old economy company? A close-in.

By Abir Pal

It's the Grasim Mr. India show. Chiselled pecs, wash-board abs and painstakingly groomed bodies are on display, standing testimony to hours of hard work and sacrifice. But the contestants aren't the only ones sweating it out. Also going through the corporate grind is the sponsor-Grasim Industries. Under the stewardship of Chairman Kumar Mangalam Birla, the flagship of the Rs 22,000-crore Aditya Birla Group, has been working overtime-trimming fat and getting those corporate muscles toned and ready.

It all started with the recommendations of its consultants-the Boston Consulting Group. Since then, Grasim has been restructured keeping in mind two principles-concentrate on core businesses and make these more efficient and productive through cost-cutting and aggressive marketing. Perhaps that's why in the last three months, Grasim's share price has moved from Rs 172.3 (on October 11, 2000) to Rs 296 (on January 14, 2001) on the Bombay Stock Exchange. So why is the stockmarket-often an accurate barometer of a company's future potential-upbeat about Grasim? The answer could lie in the rumoured talks the company is having with other Birla clans for acquiring various cement units belonging to them.

Grasim is as 'old economy' as you can get. Cement and viscose staple fibre (VSF) are its core businesses along with textiles and sponge iron. The VSF and chemicals division accounts for 39 per cent of the company's turnover of Rs 4,289 crore. Grasim has a 90 per cent share of the domestic VSF market and 22 per cent of the global market. ''But VSF's strength lies in the fact that it's the company's 'cash cow','' says Sandeep Neema, Senior Analyst, BNP Paribas Equities, a subsidiary of French bank BNP Paribas. ''Given the net sales of Rs 1,451 crore in 1999-2000 and an operating margin of 31 per cent, you could say that this division alone generated an operating profit of Rs 455 crore.''

The Cash Cow

Yet, Grasim recently hiked the price of VSF. If the division is making good money, what was the need for that? Rising input costs, avers the company. Says Shailendra K. Jain, Grasim's President ''The international prices of rayon-grade wood pulp-the primary raw material, had been rising for quite some time. In the last nine months, international prices have shot up from $640 per tonne to $750. Hence, a price rise was unavoidable.''

So what's it going to be like in the future for the cash cow? Not very bright, really, as far as volume growth goes. Viscose is already under threat from its main substitute, polyester fibre, and cotton. Add to this the VSF domestic market where growth is slowing down to 4-5 per cent. Also, it might be difficult to make further inroads into a domestic market that is saturated. Agrees Neema: ''Any further penetration will be difficult and so will further price rises, given the market's price-sensitive nature.'' Jain points out that he's trying to focus on value-added applications, with an eye on exports. ''We're trying to move up the value chain and are launching value-based applications in tandem with manufacturers of knitwear, towels and apparel. We're trying to combine fashion with functionality and all this will be marketed more aggressively.''

Aggressive marketing seems to have paid off in the case of cement-Grasim's other key business. Sales volumes grew a robust 11 per cent to 806.7 million tonnes in the first six months. But, because of declining cement prices on one hand and rising input costs on the other, net realisation or revenue per tonne for grey cement dropped 3 per cent in the first six months to Rs 1,791. The recent cement price hike may help shore up its realisation. ''Indian cement companies have hiked prices by as much as 30-40 per cent in the last eight-to-nine weeks and this will be reflected on their bottomlines,'' points out Neema.

Of course, that will happen unless allegations of cartelisation or price-fixing can be proved. A quick recap: Grasim, and other cement majors are under the Monopolies and Restrictive Trade Practices Commission's (MRTPC) scrutiny on charges of price-fixing. Senior President and Chief Financial Officer, D.D. Rathi's defence: ''There has been a continued escalation of costs over the last two years. Prices of power, labour, freight and other raw materials have gone up. So far we've survived only because of debottlenecking.''

Luckily, the outlook for the domestic cement industry looks reasonably bright. Last year, it grew by 15 per cent. This year it is expected to grow by 8-10 per cent. And, given the high-cost of greenfield projects, acquisitions may be the only way to expand capacities. In 1998, Grasim added 1.3 million metric tonnes by taking over Digvijay Cement and Dharani Cement. Says Rathi: ''We're not in the race for acquisitions at any price. However, we are open to acquisitions at reasonable prices, especially along the western corridor and in south India.'' And this is where funds from the cash-rich VSF division may prove handy.

The Laggards

But Grasim's Achilles' heel are its two other divisions-textiles and sponge iron, which account for 17 per cent of its turnover and are a drag on the bottomline. In textiles, the net realisation dropped 7 per cent-from Rs 97 per metre for the first half of 1999 to Rs 90 per metre in the same period of 2000. The operating margin also fell 8 per cent-from 14 to a negative five, in the same period. Grasim blames this on sluggish demand, high operational cost and changing fashion trends.

Rathi admits that the total capital employed or locked up is Rs 670 crore in sponge iron and Rs 255 crore in textiles. But although he rules out immediate sell-off, analysts feel this is inevitable. Says Manish Saxena, Senior Analyst, Motilal Oswal Securities: ''Even though sponge iron makes operating profits, I see no long-term viability. There's no scalability of operations-either forward or backward. There's no value-addition either, and it doesn't tie in with the synergies of the company. Sooner or later, Grasim will have to exit the business.''

An often overlooked asset is the substantial investments, valued at Rs 690 crore (at cost price), that Grasim has in various group ventures. These include Rs 163 crore in the Tata-Birla-AT&T Cellular venture, which has licences in Maharashtra (excluding Mumbai), Gujarat, Andhra Pradesh, and Goa, and Rs 239 crore in Mangalore Refineries. These holdings earn little or nothing for Grasim's shareholders. So why doesn't Grasim divest them? Says Rathi: ''A policy decision has been taken not to increase our group's holdings in the near future. So we will maintain the status quo. But as far as divesting existing holdings go, it's too premature to comment.'' But the group's crossholdings may make it difficult for Grasim to shed its stakes. Points out Motilal Oswal's Saxena:''It's not that easy to just divest Grasim's holdings alone. There are similar cross-holdings in other group companies like Hindalco and Indian Rayon. So a policy decision will have to be taken as far as the entire group is concerned.''

But despite the poor showing of its weaker divisions, financially Grasim is in fine fettle. Its debt-equity ratio is a low 0.7. The return on net worth (NP/NW), a measure of how much the shareholders are earning, is about 10 per cent. What's more, through debt restructuring and financial management, Grasim will be saving Rs 30 crore in interest costs.

Dalal Street doesn't expect any surprises from Grasim. But what it will be watching closely is how the 50-year-old company's key business-cement-will perform in the coming months. Because that's what will affect the company's bottomline. And, of course, its stock price.

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