Over the past few years, there has been an increasing trend of Indian companies acquiring or picking up stakes in foreign companies to protect their raw material supplies. Such acquisitions are done not only to provide them with a steady raw material source, but also protect them from the volatility of raw material prices in the open market.
Grasim Industries, which has been acquiring assets abroad, especially for its viscose staple fibre (VSF) plant, as the government has put in various restrictions for sourcing rayon grade wood pulp. After acquiring Domsjo Fabriker, a Swedish based leading manufacturer of speciality pulp used in the manufacturer of VSF in FY11, the company has acquired a troubled Canadian wood pulp manufacturer.
The company has said that it is acquiring Ontario-based Terrace Bay Pulp Mill for $110 million (Rs 605 crore). The acquisition will be made through two Aditya Birla group companies Grasim India and Thai Rayon. Grasim will hold 40% in the company while the remaining will be held by Thai Rayon.
Terrace Bay has been shut since December 2011 and was placed under the Companies Creditors Arrangement Act in January 2012. The company essentially makes paper grade wood pulp, but with an infusion of $250 million by the Aditya Birla group, the unit will be converted to manufacture dissolving grade rayon pulp. Over the next three years the company will be able to produce 280,000 tonne per annum of pulp. Till such time that the conversion of the plant is completed, Terrace Bay plant will produce and sell paper grade pulp.
Grasim already has a capacity of 525,000 tonne of dissolving pulp capacity through its plants in India, Canada and Sweden. However, Grasim might be in need for more raw material as it is planning an expansion of its VSF unit which will take its capacity up from 744,000 tonne to 1 million tonne.
These acquisitions will go a long way in protecting the company’s margin from the viscose segment which fluctuated from a low of 15% at the EBIT (Earning before interest and tax) level in 2009 to 31% in 2011.
Ironically though Grasim is securing one of its key raw material supply by acquisitions globally, its main manufacturing unit in Nagda, Madhya Pradesh has to be shut down almost every year on account of shortage of another raw material, water. This year too, the company announced that its staple fibre plant in Nagda would be shut down from July 3, 2012 onwards on account of delayed monsoon.
Though Grasim has taken great strides in maintaining its global leadership position in VSF, the impact of this division on the company is not too major, as the cement division remains larger in terms of sales and profits. The VSF division accounts for nearly 18% of the company’s consolidated sales but its share of EBIT is 24% in FY12. In the previous year, VSF accounted for 21% of sales and 37% of EBIT.
Thus, despite the acquisition the stock trades at Rs 2,670 a gain of 0.3% discounting its FY12 profit nearly 21 times.
