A Risk Analysis of Grasim Industries Finance Essay

GRASIM INDUSTRIES is one of the leaders in cement industry. It is apart of ADITYA BIRLA GROUP. It is the second largest producer of cement after ACC limited. KUMAR MANGALAM BIRLA is the chairman of Grasim industries.

RISK ANALYSIS

Some of the key risks affecting the Company are illustrated below:

Economic Risk

Due to the opening of world trade and diminishing tariffs, the Company is faced with the threat of pressure on margins on products. To counter these, the Company stepped up its focus on value added products by upgrading and expanding manufacturing capacities and increasing R&D. In addition, structural cost optimisation and cost control measures have been initiated. BUBBLE BURST Secondly,with the SUBPRIME CRISIS in USA which led to global turmoil to the world economy and led to the fall in the prices of real estate is one of the biggest risk being faced by GRASIM.

Competitor Risk

The market is highly competitive with the elimination of fiscal barriers and inroads of large corporates into the country with inorganic growth strategies. The Company continues to focus on increasing its market share and taking marketing initiatives that help customers in making informed decisions.

Project Execution Risk

The Company is in the process of setting up cement capacities and captive thermal power plants. The project execution is largely dependent upon land purchase, project management skills, timely delivery by the equipment suppliers and adherence to schedule by civil contractors. Any delay in project implementation will impact revenues and profit for that period. The Company is continuously reviewing the project execution to ensure that the implementation schedules are adhered.

Human Resource Risk

The Company's ability to deliver value also depends on its ability to attract, train, motivate, empower and retain the best professional talents. These abilities have to be developed across Company's rapidly expanding operations. There is significant competition from emerging service sectors, which poses inherent risks associated with the ability to hire and retain skilled and experienced professionals. The Company continuously benchmarks HR policies and practices with the best in the industry and carries out necessary improvements to attract and retain best talent and build intellectual capital.

Foreign Exchange Risk

The Company's policy is to hedge its long-term foreign exchange risk as well as short-term exposures within the defined parameters. The long-term foreign exchange liability is fully hedged, and hedges are on held to maturity basis. As imports (including capital goods import) exceeded exports, the Company has suitably hedged the differential short-term exposure from time to time to appropriately manage the currency risk.

Interest Rate Risk

The Company is exposed to interest rate fluctuations on its borrowings. It uses a judicious mix of fixed and floating rate debts within the stipulated parameters. The Company continuously monitors its interest rate exposures and whenever required, uses hedging tools to minimise interest rate risk.

Commodity Price Risk

The Company is exposed to the risk of price fluctuation on raw materials, energy sources as well as finished goods. However, considering the normal correlation in the prices of raw materials and finished goods, the risk is reduced. The Company's strategy of backward integration, like pulp and caustic soda for VSF, helps in minimising the effect of increase in prices of raw materials. Setting up of captive power plants aids in controlling the impact of rise in energy cost, which is a major cost element. Forward integration in value added products, e.g., specialty fibre in VSF, ready mix concrete in cement, wall care putty in white cement enables to reduce the impact of price fluctuation in the finished goods.

ECONOMIC RISK

The first major risk faced by the cement industry is the current market situation i.e recession, sub prime crisis, bubble burst, fall in the prices of real estate high interest rates on housing loans inflation. All these factors are a threat to cement industry as the are the forces of demand for the cement in the market.

COMPETITORS RISK

INDIAN CEMENT INDUSTRY is facing a tough competiton with CHINESE CEMENT INDUSTRY AND PAKISTAN which is creating a threat to our domestic market.

LACK OF RESOURCES

COAL-the major problem

There is lack of resources which creates problem for the cement industry in meeting its demand. Since coalfields like BCCL supply a poor quality of coal, NCL and CCL the industry has to blend high-grade coal with it. The Indian coal has a low calorific value (3,500-4,000 kcal/kg) with ash content as high as 25-30% compared to imported coal of high calorific value (7,000-8,000 kcal/kg) with low ash content 6-7% which ultimately increases the price of the cement.

ELECTRICITY

Another major hindrance to the industry is severe power cuts. Most of the cement producing states like AP, MP experience power cuts to the tune of 25-30% every year causing substantial production loss.

INFRASTRUCTURE-TRANSPORTATION

There is also the problem of inadequate availability of wagons especially on western railways and southeastern railways.

GOVERNMENT POLICIES RISK

Government policies have affected the growth of cement plants in India in various stages. The control on cement for a long time and then partial decontrol and then total decontrol has contributed to the gradual opening up of the market for cement producers.

OTHER SECTOR RISKS

CEMENT INDUSTRY has direct risk from reality sector and petroleum sector.the demand for the infrastructure developments and prices of crude oil in the foreign market and interest rates of our monetary policies directly impact our CEMENT INDUSTRY.

TECHNOLOGICAL RISKS/OPERATIONAL RISK

Another risk faced by the cement industry is the upgradation of technology which involves huge costs. huge costs are involved in setting up of plants with latest technology and their is a risk of human resource as well linked to it. RISK MANAGEMENT TECHNIQUES The Company is exposed to risks from market fluctuations of foreign exchange and interest rate. SO the various risk management techniques followed by Grasim are- The Company has a comprehensive risk management policy. The risk management inter alia provides for review of the risk assessment and mitigation procedure, laying down procedure to inform/report the Board in the matter and for periodical review of the procedure to ensure that executive management controls the risks through a properly defined framework. Foreign Exchange Risk The Company's policy is to hedge its long-term foreign exchange risk as well as short-term exposures within defined parameters. Currently, the Company has a small long-term foreign exchange liability of Rs. 20 crores which is partially hedged. The short-term exposures are covered from time to time. The Company's aggregate exports stood at Rs.101.8 crores and imports at Rs.400.6 croresin FY09. Due to the excess of imports over exports, the Company has suitably hedged the differential exposure. Interest Rate Risk The Company is exposed to interest rate fluctuations on its Rupee denominated borrowings. The Company uses judicious mix of fixed and variable rate debts within the stipulated parameters. The company does not perceive interest rate fluctuations as a significant risk, having any material impact on its profitability. COMMODITY RISK TECHNIQUE The Company is exposed to the risk of price fluctuation on raw materials, energy sources as well as finished goods. However, considering the normal correlation in the prices of raw materials and finished goods, the risk is reduced. The Company's strategy of backward integration, like pulp and caustic soda for VSF, helps in minimising the effect of increase in prices of raw materials.

RISK MANAGEMENT SYSTEM

For the operational risk management they have adopted RIS i.e risk management system which deals in

POST IMPLICATIONS OF RISK MANAGEMENT

After the implementation of various techniques the GRASIM INDUSTRIES is able to optimize its risks. The Company's cement volumes grew by 6% during the years as the benefit of new capacities accrued only towards the later part of the year. All major costs decreased. The market coverage of Ready Mix Concrete has increased substantially with large capacity expansions in the last year. Its volumes increased by 24%. Both volumes and realisation were good for White Cement. The value added product Wall Care Putty registered a 40% growth. Sales volume grew from 14.52 million tonnes in FY 07 to 15.54 million tonnes in FY08, a growth of 7%. The Company successfully transited the "Birla Plus" brand to "UltraTech Cement - The Engineer's Choice" for a common brand identity across the country.

R N D facilities- R&D was also focused on improving the processes in plants to achieve better energy consumption and reduced emissions to the environment. Future plans are towards development of new products and utilisation of waste fuels to reduce carbon foot print. The foundation stone for the White Cement R&D Centre namely "Aditya Research & Development Centre (ARDC)" was laid on 20th December, 2008. Improved decision-making, planning and prioritizing skills. Well-organized allocation of the resources and the capital. Allowed anticipate the problems and utilizes the best minimizing amount of fire fighting and preventing a disaster, which could lead to sever financial crunch. Risk management significantly improved the probability of the delivery of the business plan, within the time frame and budget. Stratergic investment by acquiring 12.89% equity in Larsen and Toubro. The Business has also enhanced its investment in Ready Mix Concrete, with excellent customer response in the markets being served. Moreover, the Business was able to reduce its cost of sales per tonne through expanded use of alternative fuels, a reduction in the freight cost, a voluntary retirement scheme at one of its major plants and various other process initiatives. In addition, the Company commissioned its new 1.0 Mn.tpa Grinding Unit at Bhatinda in Punjab. An outlay of over Rs. 460 Crores in the last 2 years was committed towards capital investment in support of these priorities; and this programme is being continued in the current fiscal. Improved throughput, reduced power costs and increased process efficiencies are the targeted outcome of this Programme.

Continuous technological upgrading and assimilation of latest technology has been going on in the cement industry. Presently 93 per cent of the total capacity in the industry is based on modern and environment-friendly dry process technology and only 7 per cent of the capacity is based on old wet and semi-dry process technology.

CONCLUSION The cement industry is one of the main beneficiaries of the infrastructure boom. With robust demand and adequate supply, the industry has bright future. The cement sector is expected to witness growth in line with the economic growth because of the strong co-relation with GDP. As far as GRASIM INDUSTRIES is concerned the company is moving at a faster rate and risk management techniques has helped it to sustain and earn profits at the time of consolidated slowdown inflationary market.

Cite this page