Grasim Industries: One-time-loss or one-time-opportunity?

Grasim Industries Ltd.—an Aditya Birla Group Company—posted a net loss of Rs 1,446 crore in Q2, FY 2018-19, against the profit of Rs 525 crore in Q2, FY 2017-18. The consolidated revenue of the Company grew 24% on a Y-o-Y (Year-on-Year) basis. On the day of results, the stock crashed nearly 8% before witnessing a mild recovery in the subsequent trading sessions…

So, what happened there?

Deep discount…

Data as on November 20, 2018

(Source: ACE Equity)

Grasim Industries posted a loss on account of a one-time exceptional item, owing to the merger of Vodafone India Ltd. with Idea Cellular Ltd. Was this what spooked the markets? Or was it the capital commitments that Grasim might have to honor in future bothering them?

From August 31, 2018 Vodafone Idea Limited (VIL) ceased to be an associate of Grasim. Post-merger, Grasim’s stake in the telecom business went down to 11.55% from 23.13%. This dilution gave rise to a one-time-non-cash-loss of Rs 2,003 crores, which reflected the difference in the book value of investments and the fair-market value of VIL, as on August 30, 2018. That’s about the one-time loss Grasim Industries suffered. And if that was the market’s concern, it seems to have got over this factor.

What markets may still be jittery about, though, is VIL’s fund raising plans.

VIL has decided to infuse Rs 25,000 crore in the telecom business, which means that Grasim’s commitment would be Rs 2,900 crore. Will these investments create a long term value for shareholders?

Is the investment commitment of Rs 2,900 crores too high for the Company, especially in a post-consolidation three-player mobile market (the second largest by subscribers globally)?  Grasim's own credit rating is ‘AAA’-stable and cash profits average Rs 1800 crore per quarter.

Clearly, myopia has clouded the underlying worth of Grasim and it trades at a 33% discount to book value!

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