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Holding company discount may weigh on Grasim merger

LiveMint logoLiveMint 27-06-2017 Harsha Jethmalani

Grasim Industries Ltd has been on investors’ radar screens since it announced its fourth quarter results last month, with all of them eager to get an update on the much-talked about restructuring plan.

To give a snapshot, on a consolidated basis, the company’s earnings were more or less in line with expectations. Segment wise, volumes in viscose staple fibre business grew 2% year-on-year, but Ebitda/tonne declined, hit by surging pulp and energy costs even as realization remained healthy. Ebitda stands for earnings before interest, tax, depreciation and amortization.

In the chemicals division, caustic soda volumes declined 6% year-on-year on lower chlorine demand. The company plans to increase its caustic soda capacity from 840 kilotonnes per annum to 1,048 kilotonnes per annum by the last quarter of fiscal year 2018 (FY18) and doubling phosphoric acid capacity by the second half of FY18.

In the cement business, domestic cement volumes were flat at 13.4 million tonnes, impacted by weak demand, especially in northern markets. Lower realizations and rising costs dragged earnings down. Grasim owns 60.24% in UltraTech Cement Ltd and that is reflected in the former’s consolidated numbers. 

A couple of brokerage firms revised the target price on shares of Grasim upwards post its March quarter earnings.

Coming to the big event, Grasim got an approval for merger with Aditya Birla Nuvo Ltd from the National Company Law Tribunal earlier this month. Post the merger, the scheme provides for demerger of financial services from amalgamated Grasim Industries into Aditya Birla Financial Services Ltd (ABFSL). Upon demerger of ABFSL, the shares will be separately listed on the stock exchange, which is likely to be effective by Q2FY18.

At a board meeting held last week, 6 July 2017 was fixed as the record date for the merger. Following the announcement, the stock rallied over 5% intraday. 

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The merger provides Grasim shareholders with a diversified portfolio of cement, textiles, chemicals, insulators, solar, telecom and financial services, said analysts. On the flip side, they fear that eventually, Grasim may turn out to be the group’s holding company with exposure to various unrelated businesses, thus attracting a higher holding company discount.

Currently, brokerage firms are working with a holding company discount in the range of 30-45%. “We believe that concerns related to any investments in Idea Cellular are over, which is comforting. We assign 40% holding company discount against 50% earlier for its holding in UltraTech, listed Investments and ABFSL,” an Emkay Research report said.

In simple terms, a company is often valued at a discount when it is part of a conglomerate. This is because investors prefer to take direct exposure to businesses. If they have to do it through a conglomerate, they would also have exposure to other businesses to which they may not want to allocate their money. So, higher the holding company discount, lower the company’s worth. 

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