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Grasim Prices Rights Issue at ₹1,812/Share

Grasim Industries’ Rights Issue: Strengthening Growth and Balancing Capital Structure

Source: Economic Times (January 5, 2024)

Layman’s Analysis

Grasim Industries is set to launch a rights issue at a price of Rs 1,812 per share starting January 17. Existing shareholders can subscribe to 6 new shares for every 179 held on the record date of January 10, with a total issue size of Rs 3,999 crore, involving the issuance of 2.21 crore new equity shares. The move aims to raise capital for ongoing expansion plans, debt repayment, and general needs. This will result in an increase in share capital from the current 65.85 crore to 68.06 crore shares after the issue.

The offered price represents a 12% discount to the current market rate of Rs 2070. This rights issue provides existing shareholders with an opportunity to participate in the company’s growth funding at a favorable rate, preventing dilution and promoting the company’s expansion. The funds raised will contribute to the company’s ongoing expansion, debt reduction, and general operational requirements. Shareholder approval for fundraising up to Rs 4,000 crore was secured in October 2022.

Grasim Prices Rights Issue at ₹1,812/Share

Impact on Investors

For minority investors in Grasim, the rights issue offers a chance to acquire additional shares at a lower cost compared to equity offers to third parties. This allows investors to participate in the company’s growth funding without significant dilution. Shareholders not participating can sell their rights entitlement.

By allocating funds towards debt repayment and capital expenditure, Grasim enhances its financial position, improving credit profiles and growth visibility across its business verticals. However, monitoring sectoral risks, such as input cost cycles, remains crucial.

For the Aditya Birla Group, using the rights issue to raise growth capital in a flagship firm allows flexibility for promoters, maintaining the group’s stake above holding company UltraTech Cements while injecting funds. Minority investors need to monitor the utilization and return on investment metrics for funded projects.

Impact on Industries

In the viscose staple fibre industry, Grasim’s expansion and similar efforts by peers like Lenzing benefit the farm economy, serving as a demand driver for wood pulp and cotton. Import substitution and the adoption of greener variants improve sustainability.

Specialty chemicals gain support from downstream effects on end-user industries, including construction and automobiles. Reduced import reliance is an additional positive aspect.

Cement sector capex aids in debottlenecking supply amid a firm housing and infrastructure pipeline post-COVID. The rights issue’s proceeds contribute to capacity addition ahead of anticipated demand growth, aligning with strategies pursued by peers like Ultratech and ACC.

The textiles value chain benefits from stable VSF supply, enhancing the competitiveness of fabric, garment, and apparel production globally. Margin pressures may ease with improved operating rates.

Long-Term View

Over the next 5-10 years, Grasim’s funding supports capacity growth in materials and chemicals, contributing to India’s expanding manufacturing output share. Growth visibility improves across construction, consumer goods export-linked sectors.

For specialty chemicals, the initiative aids import substitution and self-reliance, particularly in pharmaceutical and agrochemical sectors. Support is also provided for electric vehicle adoption through advanced materials.

Cement capacity growth aligns with expected peaks by mid-decade, supporting urbanization and housing goals while tempering inflation.

The ramp-up of viscose staple fibre helps stabilize farm incomes while boosting the competitiveness of fabric exports, supporting the textiles and downstream apparel/garments ecosystem.

Cyclical risks around input costs, energy inflation, and global growth swings need balancing through prudent project funding. Currency volatility and ESG compliance trends also require monitoring for sustained leadership.

Short-Term View

Over the next 6-12 months, Grasim’s rights issue injection accelerates near-term growth funding across materials, chemicals, and cement business divisions. Effective deployment can consolidate market share and support margin stability.

However, shareholder returns hinge on effective project execution without cost/time overruns. Any global growth slowdown poses a near-term cyclical risk to export-linked textiles and chemicals verticals.

Investors should look for clarity on capacity commercialization timelines, revenue accretion potential, and ROI metrics at each expansion milestone. Continued communication on funding utilization and project delivery will sustain confidence.

Companies Impacted by Grasim Industries’ Rights Issue:

Indian Companies Potentially Gaining:

  • Adani Group Companies: (e.g., Adani Ports & SEZ, Adani Green Energy, Adani Power): Grasim, part of the Aditya Birla Group, is a potential business partner for Adani in infrastructure projects. Increased funds could strengthen Grasim’s investment capacity, potentially benefiting Adani ventures through joint ventures or collaboration.
  • Construction & Engineering Companies: (e.g., Larsen & Toubro, NCC Ltd., KEC International): Increased capital spending by Grasim on its capex plan could lead to more contract opportunities for construction and engineering companies.
  • Financial Institutions: (e.g., HDFC Bank, ICICI Bank, Axis Bank): Acting as underwriters and distributors for the rights issue could generate fees and commissions for banks.

Indian Companies Potentially Losing:

  • Domestic Debt Issuers: (e.g., Oil & Natural Gas Corporation, Coal India Ltd.): Grasim’s rights issue could compete for domestic funds, potentially driving up borrowing costs for other companies looking to raise capital.
  • Alternative Investment Funds: (e.g., Edelweiss Infrastructure Yield Plus Fund, JM Core Investments – InvInv Fd): Grasim’s rights issue could offer another investment option for infrastructure debt, potentially impacting inflows and returns for existing funds.

Global Companies:

  • No significant impact anticipated. This is a domestic rights issue primarily targeted towards Indian investors.

Market Sentiment:

  • Short-term: Neutral to positive for Grasim and potentially related sectors like construction and infrastructure. Uncertainty for debt issuers and alternative investment funds.
  • Long-term: Depends on the success of the rights issue and Grasim’s future investments. If successful, it could boost investor confidence in Grasim and potentially the broader infrastructure sector.
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