Recommendation: Buy
CMP = Rs 2,192 (at the time of recommendation)
Price target: Rs 3,002
Key points:
- Grasim Industries (Grasim) has struck a deal with Welspun Power and Steel (Welspun) to sell its sponge iron business (Vikram Ispat) for a consideration of Rs 1,030 crore by way of a slump sale. The proceeds from the sale will be invested in the core businesses of cement and viscose staple fibre.
- The sponge iron division will be sold at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.4x FY2008 EBIDTA. Considering the poor performance of the sponge iron division in the past (low capacity utilisation and EBIDTA margin), we believe the sale would be value accretive for the shareholders of Grasim.
- At the current market price of Rs 2,192, the stock is trading at 8.8x its estimated FY2009E earnings per share (EPS).
- I maintain Buy recommendation on the stock with a price target of Rs 3,002 over next 6 months.
