Grasim's 'Holding company' discount may widen

Grasim Industries has gained spotlight as the shareholders cleared the amalgamation of Aditya Birla Nuvo (ABNL) with the company. With a nod from shareholders on the demerger and thereafter separate listing of the financial services business, ABNL's merger with Grasim is not far. However, if analysts are to be believed, the street may assign a higher holding company discount to the combined entity, thereby capping further gains.

When companies own equity stake in businesses or when they own diverse businesses (directly or indirectly), the market tends to value such companies at a discount to the total value of the businesses.

Grasim has been a textiles, chemicals and cement play up till now. However, with cement represented by its over 60 per cent stake in UltraTech, Grasim has remained its holding company. It has thus been valued by the market after assigning a 30-40 per cent discount to the actual value of cement business. With the merger of ABNL, Grasim will get exposure to financial services and telecom sectors too.

Aditya Birla group Chairman Kumar Mangalam Birla had said in a release on Tuesday that the merger will undeniably lead to shareholders' value by bringing together the strong balance sheet of Grasim and the high growth potential of ABNL's businesses. The portfolio will now span the manufacturing and services businesses with leadership positions in the cement, financial services, telecom, textiles and chemicals sectors.

While growth potential of the businesses undoubtedly increases and even as concerns over the telecom business (following merger announcement with Vodafone's India wireless business) have receded, experts fear that with Grasim now having many more diverse businesses the holding company discount can increase.

G Chokkalingam at Equinomics Research says that the street can give holding company discounts up to 80 per cent to any company depending on number of businesses it holds, the combined earnings potential of businesses and any value-unlocking opportunity if exists. Analysts say, discounts tend to be lower in case of fewer businesses or if earnings growth is strong, or if there is any value-unlocking opportunity. In case of Grasim, the number of businesses it will be owning increases, and there are lesser chances that the group may divest stake in any of the businesses, add analysts.

Analysts at ICICI Securities had earlier said that with merger likely to be completed by first half FY18, they fear Grasim may eventually turn out to be the group's holding company with exposure to various unrelated businesses and hence attracting higher holding company discount. Assuming 50 per cent discount, they had raised their sum-of-the-parts based target price to Rs 1,050 from Rs 950 based on 6xMar'19 estimated standalone EBITDA. Earlier, Motilal Oswal's analysts had also said that consequent to Grasim holding multiple businesses, the stock is likely to attract higher discount. Their target price, assuming 40 per cent discount for UltraTech, was Rs 1,060.

While the jury is out on this, the stock is trading at Rs 1,072. Further gains thus may be capped. Faster-than-expected growth in key verticals is among the few triggers from here on.