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SELL Grasim Industries – Citi

December 7, 2007

Breaking NewsCitigroup in a research report released just a while ago has recommended investors to SELL Grasim Industries Ltd with a medium Risk Rating.

In an effort to rationalize capacity, Grasim is selling its 53.63% stake in Shree Digvijay Cement (SDC) to Cimpor of Portugal. Even after the sale of this standalone 1.07m tpa plant in Gujarat, Grasim+UltraTech will have ~6m tpa of capacity in that state. Grasim has sold the SDC plant in Gujarat to rationalize its portfolio. This is an old, standalone plant with relatively lower margins (~19% in 1H FY08) and limited scope for expansion.

While higher prices in both cement and VSF could continue for the short term, we expect margin pressures due to costs in both divisions; a surge in FY09 capacity could impact cement prices adversely.

Grasim’s EPS is expected to decline from Rs 210 for FY08 to Rs 192 in FY09 and Rs 180 in FY2010. Grasim is valued on on EV/EBITDA, a common metric used for cement companies. Citi has set a target price of Rs 2,700 is based on 6.5x FY09E EV/EBITDA, a 10% premium to the stock’s seven-year mean of 5.9x. The downturn in cement in FY09E is expected to be partly offset by other businesses, which should perform well in FY09E-10E.

Dalal Street Anlays recommend investors holding the stock to book profits. Speculators with very high risk appetite can go short only when the technicals indicate a downturn.

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