We identify 8 investible urbanisation themes
themes: 1) Cities need to be built and skyscrapers need steel. 2) People need
homes. 3) The urban population needs power. 4) Where is the water? 5) An urban
society produces sewerage. 6) The new urban dweller maintains links with families
and friends. 7) Migrants will want microwaves. 8) Financial services are needed
when households have extra funds. We believe Grasim Industries is a key
beneficiary of themes 1 and 2.
More than 70% exposure to Indian construction materials
Grasim, together with its 54% subsidiary Ultratech Cement, is the second largest
cement manufacturing company in India. We expect current capacity of 32.5mt to
increase to 47mt by September 2008. As one of the largest cement manufacturers
in India, we think Grasim will be one of the key beneficiaries of strong cement
demand arising from urbanisation in India. Additionally, the company is also an
'early capacity adder’. As a consequence, we have selected Grasim as one of the 20
UBS Urbanisation Key Picks.
Medium-term & long-term growth drivers
As an 'early capacity adder', we expect Grasim to take advantage of high cement
prices on larger sales volume. Grasim and Ultratech are also adding almost
400MW captive power capacity over next two years, which would reduce the
company's dependence on costly grid power and increase operating efficiency.
Valuation
We value Grasim on a sum-of-the-parts valuation, assuming an FY09E
EV/EBITDA multiple of 6.5x for VSF; 8.7x for cement; 6.5x for sponge iron.
manufacturer of viscose staple fibre (VSF) and cement (31.5mt consolidated)
following the takeover of L&T's cement division. It also has interests in sponge
iron and textiles.
Statement of Risk
The principal risk to Grasim’s earnings arises from fluctuations in the selling
prices of its various commodity businesses—particularly cement—which
contributes more than 50% to Grasim’s consolidated EBITDA.
