>GRASIM INDUSTRIES: Acquires 40% stake in sick pulp manufacturer

Grasim Industries has announced an acquisition of 40% stake in a distressed pulp manufacturer Terrace Bay Pulp, Canada. Another 60% has been acquired by an Aditya Birla Group entity Thai Rayon. While further details have not been revealed, Grasim will infuse USD44 mn over a three year period into Terrace Bay out of a total equity requirement of USD110 mn. At this moment the mill is shutdown after an explosion in its plant in Oct’11 further weakened an already weak financial position and will be restarted by Oct’12. Terrace Bay at this moment has been placed under credit protection by Canadian authorities.


Till now the mill was producing paper grade pulp with a capacity of 550,000 tonnes per annum and over the next 3-4 years, the mill would be converted into a 280,000 tonnes per annum dissolving pulp grade manufacturer to supply VSF manufacturers like Grasim. This would require an investment of USD250 mn in total. Terrace Bay currently has total assets of USD46.3 mn and has debt of USD54 mn from Ontario province and unsecured creditors.


This acquisition is in-line with Grasim’s intention to vertically integrate and have an in-house supply of pulp for its VSF business. Grasim is expanding its VSF capacity by 156,500 tonnes per annum or by almost 50% of its current capacity in India by end of FY13 apart from creating a Greenfield capacity in Turkey. We believe more acquisitions of pulp manufacturers are likely to come through in the future as the current inhouse pulp capacity is sufficient only for ~75% of Grasim’s current capacity. Grasim’s has USD430 mn of cash on its standalone books and almost USD1 bn of cash on its consolidated books which would be more than sufficient for this acquisition and further acquisitions. Grasim in May’11 had acquired 33% stake in Domsjo Fabriker, a Swedish pulp manufacturer for USD62 mn apart from further investments. Grasim does not necessarily ship pulp from these countries to its plants in India but hedges its purchases from nearby pulp manufacturers through sales from its acquired entities to other VSF manufacturers.


We do not expect any significant reaction by the stock to these acquisitions and at current levels after rallying 20% in the last one month we expect the stock to look for an upward movement in VSF prices or cement prices/volumes to further outperform.


To read report in detail: GRASIM INDUSTRIES


RISH TRADER

>JAGRAN PRAKASHAN: Acquires Nai Dunia in an all-cash deal

JAGP, which owns India’s largest read daily Dainik Jagran, has acquired Nai Dunia (ND) – the country’s ninth largest Hindi newspaper. This acquisition gives JAGP a much-awaited entry into the underpenetrated and fast-growing markets of Madhya Pradesh (MP) and Chhattisgarh (CG), and brings consolidation in the print media industry. Financial highlights of the deal: (a) JAGP has valued ND at an enterprise value of Rs 2.25bn (incl. ~Rs 250mn debt), or ~2x EV/sales; (b) JAGP is entitled to tax benefits of ~Rs 800mn owing to ND’s accumulated losses of Rs 2bn-2.5bn. While the valuation is on the higher side given ND’s negative EBITDA, we feel this acquisition is a good strategic fit for JAGP on account of: (a) its geographical expansion in Hindi-speaking states, (b) reduction in gestation period for expansion in new territories and (c) cost and revenue synergies. Maintain BUY with TP of Rs 135.


■  Underpenetrated MP and CG markets offer good growth: Literacy rates of MP and CG are lower than the national average, and so is newspaper penetration, with sole readership at a mere 15%. With rise in disposable incomes owing to increased GDP growth rates (~6.5% for MP, 9.5% for CG), these markets offer good growth potential.


■ JAGP’s ongoing litigation in MP necessitates inorganic route: We note that JAGP has wanted to enter MP and CG since 2005. However, it couldn’t use its flagship brand Dainik Jagran due to family litigation and hence, had to either introduce a new brand or acquire an established player like ND.


■ ND – a good fit: Nai Dunia is published in the Hindi heartland states of MP and CG with a circulation of 0.5mn copies and a readership base of ~2mn, which has more than tripled over the last five years. While ND’s current readership share is 23%, its advertisement market share is ~15%. Its FY11 revenues were at Rs 1bn (FY12E: Rs 1.1bn) with 70‒75% generated from advertising (mostly local). The company incurred an EBITDA loss of Rs 250mn in FY12.


■ Turnaround to be quick, aided by synergies: On the revenue side, JAGP expects to increase the contribution from national advertising to ND’s revenues from <25% now to closer to its own 40% levels. On the cost side, JAGP will benefit from reduced newsprint and manpower costs.


■ Deal financial summary: The deal was closed for an all-cash consideration of ~Rs 2.25bn (including debt). However, JAGP stands to gain tax benefits to the tune of Rs 0.8bn owing to ND’s accumulated losses. Post the deal, JAGP has Rs 1bn of net cash on its books.


■ Maintain BUY with a TP of Rs 135: We believe that this acquisition is another step in the direction of consolidation in the print media space, wherein smaller regional players will be acquired by larger national players like JAGP, owing to both revenue and cost synergies. We continue to like the print media space because of: (a) healthy ROEs (25% +), (b) good dividend payouts (45‒50%) and (c) attractive valuations (currently 12.7x FY14E). Maintain BUY with a TP of Rs 135 (17x FY14E).


To read full report: JAGRAN PRAKASHAN
RISH TRADER