Street wary of Grasim's investment in arms despite good standalone Q2 show

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Despite clocking strong growth in revenue and operating profit on a standalone basis for the September 2018 quarter (Q2), Grasim reported a net loss due to one–offs or exceptional items. The Q2 results were declared post market hours on Wednesday. But, the bigger concern pertains to Grasim's rising investment in its group companies. Consequently, the stock fell 7.9 per cent on Thursday.   

Grasim has been a holding company (holds stake) for the group's businesses such as cement (UltraTech), telecom (Vodafone Idea), financial services (Aditya Birla Capital), textile, etc. Post-merger of Vodafone India and Idea Cellular, Grasim now sees its stake in Idea decline from 23.11 per cent to 11.5 per cent. With reduction in the holding of Grasim in Vodafone Idea, the merged company ceased to be its associate company. Consequently, the investment value in Grasim's books is to be reflected at current market price vis-a-vis the book value. As a result, it led to a one-time non-cash exceptional adjustment of Rs 20 billion (net of tax). Hence, Grasim reported a consolidated loss of Rs 14.46 billion. However, adjusted for exceptional items, net profit would have come at Rs 6.26 billion.  

The core business of viscose staple fibre (VSF), chemicals and pulp, however, did well in Q2. Standalone revenue increased 26 per cent year-on-year led by VSF (up 23 per cent) and chemicals (up 38 per cent) segments. Operating profit, too, was up 28 per cent, beating analysts' expectations. 

But, despite the stellar show, rising concerns on fund infusion in subsidiaries and joint ventures is keeping the Street worried. As a result, analysts are assigning a higher discount, commonly referred to as 'holding company discount', to the combined value of Grasim's standalone business and investments. Edelweiss says that the high odds of Rs 29 billion fund infusion in Vodafone Idea (assuming steady 11.5 per cent stake) and possibility of fund infusion into Aditya Birla Capital (not yet finalised) will be an overhang for the stock. Consequentially, they now assume a higher holding company discount of 50 per cent versus 40 per cent earlier for valuing the key holdings and thereby have sharply lowered their target price to Rs 1,066 from Rs 1,332 earlier. Even Motilal Oswal Securities has ascribed a 50 per cent discount to Grasim's investment and arrived at target price of Rs 973 for the stock trading at Rs 808 levels.  


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