VSF halved Grasim's fortunes compared to Ultratech

Ever wondered a parent company trading at half the value of its subsidiary? Grasim Industries, which holds over 60 per cent in Ultra-Tech Cement, is. Its market capitalisation of Rs30,280 crore is less than half of the cement major’s market capitalisation ofRs67,000 crore.

This significant difference has been due to the poor performance of the viscose staple fibre (VSF) division of Grasim Industries in the last few years. The VSF segment contributes close to 20 per cent to the company’s consolidated revenues. Grasim’s earnings before interest and tax, or EBIT, from its VSF division have fallen to Rs481 crore in FY14 crore from Rs1,492 crore in FY11.






VSF volumes have remained strong globally and have grown in double digits in the past three to four years. However, prices have been under pressure due to oversupply in China. At present, China has a VSF capacity of 3.3 mt against a demand of 2.8 mt. Given the oversupply, global VSF prices have been down 15per cent compared with the previous year.

The trend is expected to reverse in the next few quarters. Traditionally, VSF has commanded a premium over cotton because there’s less wastage and it helps produce more yarn. So VSF prices, which had been trading at a discount to cotton prices, may catch up in the coming quarters. VSF is also used as a raw material instead of cotton, depending on the demand-supply situation and prices of both raw materials.

Amid concerns over the VSF business, the valuation gap between Grasim Industries and UltraTech Cement has widened. Grasim’s stock is trading at 1.3 times the stock price of UltraTech, compared to a historic multiple of 1.5 times. Typically, stock prices of both the companies move in tandem. According to foreign brokerage CLSA, at the current market price, UltraTech is trading at $175 per tonne while Grasim’s assets are priced at an implied value of $100 per tonne.

This makes Grasim’s stock attractive even after factoring in a holding company discount of 25-30per cent for assets of its subsidiary. Given the improving outlook of its VSF business, Grasim’s valuations are expected to catch up with Ultra-Tech Cement in the coming quarters. Grasim derives close to 20per cent of its revenues from the VSF division, while 75per cent of revenues come through its 60per cent holding in UltraTech, the largest cement player by capacity.