Yet another step towards integration of VSF business Grasim Industries (GIL) has signed an agreement to acquire Canada based-Terrace Bay Pulp Inc (TBP) which has 285,000tn of paper grade pulp capacity. GIL, which has valued the assets of TBP at US$110mn, will pay US$44mn for its 40% stake in TBP, while the remaining 60% will be held by Thai Rayon Public. The company plans to convert TBP’s paper grade pulp capacity to rayon grade pulp, which would be used in its viscose staple fibre (VSF) unit. We believe this is another step by GIL to increase its reliance on captive sources for major raw materials that are required for producing VSF and also develop an integrated business model that is immune to rising input costs. We retain our target price of Rs2,898 on GIL, but downgrade our rating from Buy to Hold because of the recent surge in stock price.
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Key highlights: GIL will acquire the assets of TBP through a SPV (special purpose vehicle), AV Terrace Bay Inc, in which GIL will hold 40% stake and the remaining 60% stake will be held by Thai Rayon Public. GIL, which has valued the assets of TBP at US$110mn, would spend another US$250mn to upgrade and expand the plant. GIL would contribute US$44mn to the total equity of US$110mn. TBP, owned by Buchanan Forest Products, has been shut since the past two months. The promoters were trying to sell the company due to a liquidity crunch. The TBP mill is capable of producing various blends of northern bleached softwood kraft pulp and northern bleached hardwood kraft pulp along with certain other by-products. The TBP mill is considered an anchor mill due to its location and its significant consumption of residual chips produced by regional saw mills. GIL plans to produce dissolving grade pulp from October 2012 until the conversion of the mill capacity to make rayon grade pulp. The conversion is expected to be completed in the next three years. In FY12, the company had acquired a 33% stake in Domsjo Fabriker AB, thereby assuring the supply of high quality pulp for its new greenfield capacity at Vilayat (Gujarat). With this acquisition, the company would also get assured pulp supply for its Karnataka plant, which is undergoing brownfield expansion. Valuation: At the current market price, GIL trades at a PE multiple of 8.4x and EV/EBITDA of 3.5x on FY14E earnings. We retain our target price of Rs2,898 based on SOTP valuation, but have downgraded our rating from Buy to Hold because of the recent surge in stock price. We have valued the 60% stake of the company in Ultratech Cement (UCL) at Rs2,016/share (after giving a 20% holding company discount to UCL’s TP of Rs1,496).The VSF business is valued at EV/EBITDA of 5x (Rs645/share), other business segments combined at EV/EBITDA of 4x (Rs43/share) and investments at a 20% discount to the CMP, at Rs 263/share.
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