FINANCE PROJECT Textile Industry Company : Grasim Industries Ltd. Surbhi Modi Seat no.

13 Section E 11BSPHH010871

GRASIM INDUSTRIES
OVERVIEW
Grasim has a strong presence in fabrics and synthetic yarns through its subsidiary, Grasim Bhiwani Textiles Limited (GBTL), and is well known for its branded suitings, Grasim and Graviera, mainly in the polyester - cellulosic branded menswear. GBTL's plant is located at Bhiwani (Haryana). Fabric operations are centralized at Bhiwani with a processing capacity of 17.0 million meters a year. Vikram Woolens, Malanpur, a unit of Grasim manufactures worsted dyed yarn spun from 100 per cent merino wool along with polyester and other blends. Grasim's strong nationwide retail network includes exclusive showrooms, wholesalers and multi-brand outlets through which it reaches its customers. Grasim caters to international fashion houses in the USA and UK supplying fabric to them for manufacturing of garments, which are available in some of the largest retail chain stores.

SWOT ANALYSIS
STRENGTHS Grasim is the worlds No.1 in the Viscose Staple Fiber sector with the Groups current capacity, in excess of 744,000 tons. The Textile subsidiary, GBTL, recorded a revenue growth of 19% from ` 288 crore to ` 342 crore, driven both by higher off take in the Ready Made Garment segment and better pricing. Grasim has strong nation-wide retail network and also caters to international fashion houses in USA and UK. The business will also continue to invest in building a strong R&D base for both fiber and pulp. WEAKNESSES While the VSF business witnessed growing demand and realizations, these were accompanied by increasing pressure on prices of key raw materials. Higher fiber and yarn prices were passed on to customers. As expansions continue to remain a priority for the Company, execution of large projects is exposed to risks of time and cost over-run.

OPPORTUNITIES The acquisition of Domsj Fabriker, a world-class company with cutting edge technology, is in line with being a high point. Global VSF demand is expected to grow at 5-6%. THREATS The profitability in the short term will be governed by the prices of competing fibers, inputs and energy costs. The market is highly competitive with no fiscal barriers and entry of large MNCs into the country with inorganic growth strategies. Company is exposed to interest rate fluctuations on its borrowings. Company is exposed to the risk of price fluctuation on raw materials, energy sources as well as finished goods.

ANALYSIS OF WEIGHTED AVERAGE COST OF CAPITAL:

CORRELATION BETA Apr-06 to 0.70 Apr-06 to 1.09 Mar-11 55 Mar-11 08 Apr-06 to 0.83 Apr-06 to 1.84 Mar-07 15 Mar-07 11 Apr-07 to 0.74 Apr-07 to 0.99 Mar-08 98 Mar-08 00 Apr-08 to 0.65 Apr-08 to 1.16 Mar-09 70 Mar-09 75 Apr-09 to 0.62 Apr-09 to 0.66 Mar-10 RISK CAPM 68 Mar-10 02 Apr-10 to 0.44 Apr-06 to 0.173 Apr-06 13.43 Apr-10 to 0.84 Mar-11 87 Mar-11 6 93 Mar-11 86 Apr-06 to 0.275 Apr-06 to 14.25 Mar-07 9 Mar-07 30 Apr-07 to 0.241 Apr-07 to 10.99 Mar-08 1 Mar-08 67 Apr-08 to 19.24 Apr-08 to 0.402 Mar-09 95 Mar-09 1 Apr-09 to 10.47 Apr-09 to 0.616 EFFECTIVE ANNUAL MARKET RETURN Mar-10 62 Mar-10 1 Apr-10 to (SENSEX) Rm 11.29 Apr-10 to Mar-11 to Mar-11 80 Apr-06 16.5787 0.123 Mar-11 3 Apr-06 to Mar-07 18.6378 Apr-07 to Mar-08 24.2700 Apr-08 to Mar-09 -33.2936 Apr-09 to Mar-10 89.1994 Apr-10 to Mar-11 13.1018

EFFECTIVE ANNUAL RETURN OF GRASIM Apr-06 to Mar-11 16.2391 Apr-06 to Mar-07 14.7809 Apr-07 to Mar-08 31.4587 Apr-08 to Mar-09 -23.6157 Apr-09 to Mar-10 89.4457 Apr-10 to Mar-11 -4.6992 COST OF EQUITY COST OF LOAN WACC VALUE OF EQUITY SHARE 0.2759 0.0544 0.2625 21.8957 0.2411 0.1406 0.2334 0.4021 0.0844 0.3627 0.6161 0.1028 0.5627 0.1233 0.1354 0.1240

The risk free rate is approximated by the highly liquid 91-day T-bills in India in March 2011, which is about 8%. Grasim has a beta of 1.0908 based on the monthly returns during April 2006 to March 2011. A beta of more than 1 means that Grasims returns are more volatile than the market (Sensex) returns i.e. the returns fluctuates more than that of the market portfolio. Hence the expected return on the shares of the company will be high due to the high beta. The high beta of the company may be due to the cyclical nature of the companys business & also because of high operating & financial leverage.

 The correlation for 5 years together between the market Sensex & Grasim is 0.7055, which is less than 1 but somewhat nearer to 1. They share a little relationship. The risk of return for 5 years together is 13.4393, which is much of a deviation. The CAPM-based cost of equity for Grasim (17.36%) is much higher than the estimates according to the dividend growth model. Therefore, we have used 17.36% as Grasims cost of equity. The after tax Cost of debt is about 5.44% (tax rate being 30%) in March 2011, & it is assumed that Grasim will incur this cost in obtaining debt in the future as well. Grasims weighted average cost of capital is 26.25%. If Grasim is considering an investment project of average risk i.e. similar to Grasims risk that has the same capital structure as the firm, then it can use 26.25% as the discount rate to compute the projects NPV. Grasim cannot use its WACC for evaluating those projects that have higher or lower risk than the firm.