Despite apprehensions in the markets that Grasim Industries actually paid a hefty premium for the stake in Larsen & Toubro, the Aditya Birla flagship remains satisfied with its investment.
"Financially, Grasim has always been a very conservative company, and we would have never offered such a price had we thought we were paying too high," senior Grasim officials said.
"The market price (of Rs 215 on Friday) was only a reference point. Last year, the stock had hit Rs 624. So what is a fair valuation?" the official asked.
Internally, Grasim appears to have compared its investments against those made by Gujarat Ambuja for ACC's (around $150 a tonne) and by Lafarge for Raymond's ($79 a tonne) units.
"In comparison, the price we paid puts the residual enterprise value of L&T's cement business at $80 a tonne," Grasim officials said.
"And, this is not a full acquisition price but a part-acquisition price. Besides, we are getting a large chunk at one go and will be the single-largest shareholder block after the institutions. Only LIC is a larger shareholder in L&T than us," they added.
"Even if you look at the engineering and construction business of L&T, they have a earnings multiple between 8x to 8.5x. This is far lower when compared to other engineering companies like BHEL, ABB or others," the officials said.
Grasim officials argued that they did not have the benefit of a due diligence, and had to arrive at a fair valuation for L&T on the basis of its balance sheet.
The Grasim-L&T combine would have a major control of the cement markets with a combined capacity of 28 million tonne. Grasim is also implementing a 3.5 million tonne capacity expansion plan, which will further strengthen the combine.
However, Grasim officials declined to talk on the board representation issue, or which Birla nominees could be on the L&T board.
