Should I invest in Grasim Industries?
-Kashish Mehra
Grasim Industries, the Aditya Birla Group’s flagship company, was originally a textile manufacturer before diversifying into viscose staple fibre (VSF), cement and chemicals. The cement and VSF businesses contribute 96.3 per cent of its revenue. It is the second largest producer of caustic soda (used in the production of VSF). After acquiring UltraTech it has become India's leading cement manufacturer.
Over the past five years, the company’s total income has grown at a compounded annual rate of 15.9 per cent and profit after tax at 20.1 per cent. Its return on net worth has averaged 31.9 per cent over this period. Grasim has a low debt-to-equity ratio of 0.47 and pays dividend regularly.
UltraTech is undertaking brown field expansion aggregating 9.2 million tonnes per annum of cement at its units in Chhattisgarh and Karnataka. To secure the supply of pulp for VSF, Grasim has acquired one-third stake in Aditya Holding AB, Sweden, which acquired Domsjo Fabriker AB (Domsjo) of Sweden.
The stock is trading at a P/E ratio of 16.5 which is above its five-year median P/E of 14.15. Based on a five-year CAGR in EPS of 12.8 per cent, its PEG ratio comes to 1.3. Addition of new cement capacity over the next two years could put pressure on prices. In the VSF segment, demand is expected to be volatile due to adverse conditions both in India and in the euro zone. The stock’s valuation looks stretched. Buy on dips.
This article was originally published on February 16, 2012.
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