Grasim Industries Ltd

OVERVIEW

The Financial Year 2009-10 began on a subdued note with the continued impact of theglobal economic crisis. The timely policy response from the Indian Government and theresilience of the Indian economy led to a sharp ‘V’ shaped recovery, in spite ofthe uncertainty over sub normal monsoon. The resurgence has been broad-based with bothServices and Manufacturing sector growing at high rates. All leading indicators includingIIP growth, credit growth, continuous surge in imports and exports since November 2009 andthe growth in all industry groups point towards a sustainable recovery. Though inflationand currency appreciation may pose challenges in the short term, RBI’s timelymonetary initiatives, including the calibrated exit from the accommodative stance, willensure that India’s growth remains unhindered. The year has proved that though theIndian economy is interlinked with the global economy, its focus on domestic markets andthe Government’s prudent policies will help maintain a high growth trajectory.

Your Company’s businesses benefited from strong demand recovery and decline ininput costs due to lower commodity prices globally during the year.

STRATEGIC INITIATIVES

FY 2010 has been a watershed year for your Company as we reinforce our focus on ourcore businesses, Cement and VSF, and brace ourselves for growth opportunities in thesebusinesses.

1. Sale of Sponge Iron Business

Your Company divested its Sponge Iron business at a sale consideration of Rs. 1,030Crores, resulting in a net gain of Rs.336 Crores. The transaction was completed on 22ndMay, 2009.

2. Completion of cement expansion plan

Your Company completed its ongoing cement expansions. The 3.1 million TPA grindingcapacity at Kotputli, Rajasthan became operational in Q4FY10. Grinding capacities of 1.6million TPA at Shambhupura (Rajasthan), 1.3 million TPA at Aligarh (U.P.), both in Grasimand 1.2 million TPA at Tadpatri (A.P.) in UltraTech Cement Ltd. (UltraTech) were alsocommissioned during the year. The consolidated cement capacity of your Company standsincreased from 41.6 million TPA at the start of the year to 48.8 million TPA at the end ofthis phase of expansion.

3. Demerger of the Cement Business

Before embarking on the next round of expansion, your Company has restructured itscement business creating a pure play Cement Company, while ensuring alignment of interestsof all stakeholders. Restructuring has created a strong financial platform for pursuingaggressive growth.

The cement business has been demerged into Samruddhi Cement Ltd. (Samruddhi), asubsidiary of your Company w.e.f. 1^st October, 2009. It will hold all thecement assets of Grasim including the grey cement business, RMC and white cement assets.Equity shares of Rs.5/- credited as fully paid up will be allotted in Samruddhi toGrasim’s shareholders in the ratio of 1:1. Samruddhi will be listed on the stockexchanges. Grasim will continue to hold majority stake in and provide support to therapidly growing cement business.

The Hon’ble High Courts of Madhya Pradesh and Gujarat have approved the Scheme.The demerger has become effective from 18^th May, 2010.

Concurrently, the Board of Directors of UltraTech Cement Ltd., a subsidiary of yourCompany and Samruddhi have decided to amalgamate Samruddhi with UltraTech under a schemeof amalgamation with effect from 1st July, 2010. This will result in the creation of thelargest pure play cement Company in India. All the shareholders of Samruddhi will receive4 equity shares of Rs.10 each of UltraTech for every 7 shares of Rs.5 each held on recorddate to be fixed up for the purpose. The merger is expected to be completed by July, 2010.

4. Acquisition of Star Cement assets

UltraTech plans to acquire the assets of ETA Star Cement Company LLC comprising of 2.3million TPA clinker facility and grinding units of 2.1 million TPA in UAE, 0.4 million TPAin Bahrain and 0.5 million TPA in Bangladesh. With this acquisition, UltraTech will gaindirect access to the markets in the Middle East and neighbouring regions.

Your Company will continue to focus on the Cement and VSF businesses. The combinationof these two businesses has created significant shareholder value with cash flow from VSFbusiness being utilised for growing the cement business aggressively. Consequently,revenues and EBIDTA have grown 4.7 times and 8.6 times respectively in the last decade.Grasim has significantly outperformed the sensex over the last eleven years multiplyingits share price 17.8 times as against a 4.7 times growth of the sensex.

Cement

Note:Grasim’s Cement business demerged to Samruddhi Cement w.e.f. 1^stOctober, 2009. Samruddhi Cement aggregated with Grasim Cement Standalone for comparisonpurpose

$ Includes captive consumption for RMC

$$ Includes captive consumption for value added products

* Includes income of Cement subsidiaries related to unallocated corporate capitalemployed

Performance Review

Cement demand saw a double digit growth of 11%, one of the highest in the decade,recording total despatches of around 200 million tonne. This is despite sub normalmonsoon. The demand upturn has been generally broad based. The growth was supported byeconomic recovery, reduction in excise duty, Government’s initiatives viz. NationalRural Employment Guarantee and low cost housing. The eastern region grew at a phenomenal22% - the highest among all the regions. The northern region came a close second, with agrowth of 16% spurred by the low cost housing schemes of various state governments and theinfrastructure creation for Commonwealth Games in New Delhi. The growth in the Southernregion was muted due to floods in A.P. and Karnataka, and the political unrest in A.P.during part of the year. Your Company outperformed the industry by a wide margin,supported by capacity addition, recording cement volumes growth of 14%. Its market shareincreased from 17.8% in FY09 to 18.5% in FY10.

The average cement realizations were marginally higher for Grasimstandalone/Samruddhi’s cement business and flat for UltraTech vis-a-vis the lastyear. The bunching of new capacities created a downward pressure in cement prices acrossthe regions in the third quarter. The decline was more pronounced in the Southern Region.Unavailability of railway wagons in various pockets of the country resulted in underutilisation of capacity. Quarter 4 witnessed a partial recovery in cement prices withrenewed construction activity and increase in taxes and energy prices.

Clinker export prices declined during the year on account of lower demand and excesscapacity creation in the Middle East.

White Cement division has grown from strength to strength. The division has sustainedits leadership over the years through delivering impeccable quality products. It continuesto achieve record performance every quarter, on the back of both increased volumes andprices. White Cement volumes increased by 16%. Wall care putty continued to growimpressively, recording a growth of around 40% for the second year in a row.

The Ready mix concrete division is emerging out of the sluggishness, with recovery inthe real estate segment. The economic meltdown had seriously affected the financial healthof real estate players which in turn impacted the performance of Ready mix concretedivision for the last one and a half years. Volumes in the fourth quarter however, grew by18%.

On the cost front, the business gained from the global softness in energy prices in thefirst nine months. It has petered off in the last quarter. With new power plantscommissioned during the last year, the share of captive power in Grasim increased from 60%to 75%. UltraTech’s captive power usage was 73% as against 39% last year. Withimproved operating efficiencies in terms of higher captive power, lower lead distance,higher blended cement and reduced costs, operating margin of the cement business for theyear improved from 27.5% to 30.7%, despite the impact of ramp up cost of the newcapacities.

Outlook for Cement Business

Cement demand is expected to remain buoyant with increased domestic consumption, bothin the government as well as the private sector. The Government has reiterated itscommitment to infrastructure spending in the budget. The Planning Commission in itsmidterm appraisal of the 11^th year plan has envisaged an expenditure of Rs.20.5trillion on infrastructure during the plan period. Additionally, the broad based economicgrowth will continue to drive cement demand from semi urban and rural India with theirrising prosperity levels. With the economy having recovered from the slow down, revival inorganised real estate and corporate capex are also expected to add to the buoyancy indemand. Overall, cement demand is expected to grow at a robust 10% + for the next fiveyears.

The surplus supply scenario, however, is expected to create short term pressure. Newcapacities commissioned during FY10 are in various stages of ramp up while additionalcapacities continue to be set up. The full ramp of capacities might lead to a surplusscenario after peak demand in Q1FY11, which may last for 6 to 8 quarters.

On the cost front, higher coal prices are likely to exert pressure on margins in FY11.The Company’s focus on higher volume growth, better logistics support, together withcost efficiency, should help in partially mitigating the impact.

Your Company continues to focus on achieving greater than industry growth and buildingsustainable competitive advantage through its reach, service and cost competitiveness. Itsdistribution network is being further expanded throughout India particularly in ruralareas to increase the reach. Customer responsiveness is being further improved with theimplementation of online order booking and tracking system. To enhance customer experienceand create awareness at the end consumer level, your Company has developed home conceptstores, UltraTech Building Solutions, where customers can buy cement and allied buildingproducts.

Capex Plan – Cement Business

Nurturing growth and sharpening competitiveness are at the core of our businessstrategy. Your Company’s capex investments are aimed at meeting these objectives. Weaim to grow faster than the market with a blend of organic and inorganic growth. TheCompany would require an additional capacity of around 25 million tonnes over the next 5years just to retain its market share. The Company is examining various options and has atarget to start work on Brownfield expansions of 10 million tonnes latest by Q4FY11 afterthe completion of the detailed study.

An overall capital outlay of Rs.4,475 Crores has been earmarked for the cement businessexcluding capex for new capacity creation. This will be spent over the next 2 years onadditional grinding and evacuation facility, logistics infrastructure, waste heat recoverysystems, captive thermal power plants, completion of existing projects and modernization.

Viscose Staple Fibre (VSF)

Performance Review

The recovery in the textile sector was faster than anticipated and was more pronouncedin the emerging markets of China and other Asian countries, and South America. While theimprovement in Chinese demand was largely driven by the increase in their domesticconsumption, other markets derived the advantage of improvement in their domestic marketas well as export markets. This recovery led to a sharp increase in demand for VSF. Thesituation was further accentuated by a 7% decline in global cotton production in 2009.However, VSF production in China despite available capacity was restricted due to limitedavailability of Cotton Linter Pulp and Rayon grade Wood Pulp. The high demand for VSF withconstraints in production has led to an increase in realization.

Against this backdrop, your Company’s sales volumes increased significantly by 29%(buoyed by additional volume from the newly installed capacity at Kharach plant towardsend FY08) and realisation increased by 10% over the last fiscal. Higher demand emanatedfrom both domestic as well as export markets. These macro environmental factors coupledwith the availability of low cost pulp from captive facilities and long term contractsresulted in a significant rise in the margins and profits for the year under review.

Capex Plan

Your Company is setting up an 80,000 TPA Greenfield VSF plant at Vilayat (Gujarat).Your Company has already acquired the land and received necessary environmental and otherclearances for the project. The plant is likely to be commissioned in FY13. Your Companyis also examining a proposal for setting up of facilities for caustic and power plants atVilayat.

Sector Outlook

The sustained recovery of consumer demand in the US and European markets is criticalfor the growth of the VSF sector. While recovery in the western markets is currently slow,the outlook for VSF in the short to medium term looks positive due to the shortage ofcotton and increase in the domestic demand of China, Asia and a few other countries. Atthe same time, high ruling prices of VSF have increased its price differential with othercompeting fibres, posing a threat of substitution which may adversely impact VSF volumes.

The input costs, mainly of Pulp and Sulphur, have increased sharply in the last fewmonths. The pulp prices are expected to rule high in the short to medium term as no newpulp capacities may come on stream in the near future and the demand is expected to remainhigh. The rising trend in input costs with limited possibility of further increase inprices and emerging surplus capacity situation in China is expected to exert pressure onmargins.

Business Outlook

In the short to medium term, we expect the demand for VSF to be firm. Input costs areexpected to rise, leading to a reduction in margins from current high level.

The production at the Nagda plant is likely to get suspended for a few weeks in Q1FY11due to water shortage. However all efforts are being made to minimize the stoppage.

Your Company’s focus and efforts to increase the share of exports and specialtyfibre will continue. The Textile Research and Application Development Centre at Kharach isconstantly developing newer applications of VSF in close co-ordination with customers. Thebusiness will also continue to focus on cost reduction measures particularly in energy,logistics and overheads to maintain its position of lowest cost producer.

Chemicals

Performance Review

The chemical business achieved its highest ever caustic production, registering agrowth of 11% despite the water shortage impacting operations in the first quarter. Salesvolumes grew by 11% against the industry growth of 5%. In spite of higher volumes, theoperating profit decreased by 20%, mainly on account of decrease in ECU realisations.Caustic prices fell due to cheap imports.

Sector Outlook

Caustic prices are expected to remain under pressure due to the commissioning of newcapacities coupled with cheap imports. However, a gradual price recovery is expected withthe improvement in market conditions and international prices. Chlorine prices may improvewith higher demand for chlorine derivatives in export markets.

Business Outlook

The Business is planning to build caustic capacity along with the VSF greenfieldproject at Vilayat, Gujarat, to meet the captive requirement for VSF.

Production will be curtailed in the first quarter till the onset of monsoon due towater shortage. The business will continue to take energy conservation measures to reducepower consumption.

Grasim Bhiwani Textiles Limited (GBTL)

GBTL, the textile subsidiary of your Company posted a better than expected performance.Net revenue increased by 10% to Rs.287 Crores with higher sales in both, Over The Counterand Readymade Garments segments. A new thermal power plant commissioned last year has ledto substantial cost savings and has generated profits on power sale. In addition, captivepower provides uninterrupted power supply, enabling better capacity utilization. Netprofit increased to Rs.4.6 Crores as against a marginal profit of Rs.0.3 Crores in FY09.

FINANCIAL REVIEW AND ANALYSIS

* Without giving impact of demerger

Net Income from Operations

Net income from operations at Rs.20,195 Crores increased by 9% driven by higher volumesin both Cement and VSF businesses.

Other Income

Other income is up by 11% during the year on account of higher treasury income.

Operating Profit (PBIDT)

PBIDT rose by 32% with higher volumes, lower input and energy prices as elaboratedunder the Segmental Review and Analysis.

Interest

Interest cost increased from Rs.307 Crores to Rs.335 Crores (net of interestcapitalised). Loans aggregating Rs.650 Crores were raised during the year to fund capex.Interest capitalised reduced from Rs.90 Crores to Rs.32 Crores with the commissioning ofprojects. Interest cover (including interest capitalised) remains at a comfortable levelof 13.9 times.

Depreciation

Net addition to the Gross Block was Rs.1,883 Crores due to the commissioning of cementprojects and other capex. As a result, Rs.995 Crores was provided towards depreciationcharge in FY10 as against Rs.866 Crores in FY09, an increase of 15%.

Total Tax Expenses

The total tax soared by 58% at Rs.1,571 Crores primarily due to higher profits. Thecurrent tax was substantially higher at Rs.1,239 Crores in the current year as againstRs.551 Crores in the previous year. Excess tax provision of Rs.25 Crores related toearlier years was written back. Provision for deferred tax decreased to Rs.357 Crores inthe current year from Rs.441 Crores in the previous year.

Net Profit after Total Tax (Before Extraordinary Gain)

Net profit before extraordinary gain was Rs.2,759 Crores in FY10, as against Rs.2,187Crores in FY09, an increase of 26%.

Extraordinary Gain

There was an extraordinary gain of Rs.336 Crores (net of tax) arising from sale ofSponge Iron business.

Net Profit (including Extraordinary Gain)

Net Profit for FY10 stood at Rs.3,096 Crores including extraordinary gain, compared toRs.2,187 Crores in FY09.

Due to demerger of the Cement business w.e.f 1st October, 2009, the net profit afterminority share has reduced by Rs.243 Crores in FY10. This is on account of thedifferential tax treatment of Rs.27 Crores in FY10 and minority share (35%) of Samruddhi(being shares to be issued to Grasim’s Shareholders in terms of the demerger scheme).Adding these, the total net profit was higher at Rs.3,339 Crores for the year (Growth of53%).

Standalone Financial Performance

* The reported results are not comparable since Cement business has been demergedw.e.f. 01.10.09 whereas FY09 had cement numbers for the full year. Hence, numbers withoutgiving impact of demerger are also given for better comparison.

Standalone results were impressive with VSF and Cement business doing better. Netincome from opreations Rs.12,641 Crores increased by 15% despite sale of Sponge IronBusiness during the year. Coupled with lower input prices, Profit after Tax excludingextraordinary gain increased from Rs.1,648 Crores in FY09 to Rs.2,404 Crores in FY10.Including extraordinary gain of Rs.336 Crores on sale of sponge iron business, profitincreased by 66%.

Cash from Operations

Cash from operations was Rs.2,235 Crores during the year.

Extraordinary Item

Proceeds from sale of sponge iron unit were Rs.1,025 Crores.

Net Increase in Investments

Major net investments of your Company during the year includes:

— Rs.1,386 Crores in the debt scheme of various mutual funds and Rs.33 Crores ingovernment securities

— Rs.172 Crores in the purchase of equity shares of its subsidiary UltraTechCement Ltd., earlier held by the Company’s wholly owned subsidiary

— Rs.85 Crores towards the capitalisation of subsidiary Samruddhi Cement Ltd.

— Rs.40 Crores in AV Nackwic, a joint venture for pulp in Canada

— Rs.10 Crores in Birla Lao Pulp and Plantation, a joint venture for plantation inLaos.

Capital Expenditure (Net)

Your Company spent Rs.705 Crores towards the completion of expansion projects in thecement business, and normal modernisation in all the businesses.

Increase in Working Capital

The increase in stores and spares and finished goods in cement business with thecommissioning of new plants and increase in sundry debtors in VSF and Cement business dueto enhanced sales led to higher working capital.

Decrease in Debts

Long Term debts of Rs.312 Crores comprising of Rs.221 Crores of foreign currency loan,Rs.70 Crores of non convertible debentures and Rs.21 Crores of rupee term loan wererepaid. Deferred sales tax loan decreased by Rs.71 Crores. Short term borrowings are lowerby Rs.41 Crores.

Non convertible debentures of Rs.200 Crores were raised to fund cement capacityexpansion in the first half.

Dividend

A dividend of Rs.30 per share amounting to Rs.315 Crores (including corporate tax ondividend of Rs.41 Crores) was paid for FY09.

RISKS AND CONCERNS

Your Company has a comprehensive risk management policy. The risk management policyinter alia provides for risk identification, assessment, reporting and mitigationprocedure. The risk management framework actively supports the Board in its strategicdecision making.

During the year, the Audit Committee, reviewed the adequacy of the risk managementframework of the Company, the key risks associated with the different businesses and themeasures in place to mitigate the same.

An analysis of the Company’s key business risks and mitigation plans is asfollows:

Competitor Risk

The market is highly competitive with no fiscal barriers and entry of large MNCs intothe country with inorganic growth strategies. Your Company continues to focus onincreasing its market share and taking marketing initiatives that help createdifferentiation and provide optimum service to its customers.

Project Execution Risk

As expansions continue to remain a priority for the Company, execution success forlarge capex projects is exposed to risks of time and cost overrun. Project execution islargely dependent upon land purchase, project management skills, timely delivery by theequipment suppliers and adherence to schedule by civil contractors. Any delay in projectimplementation will erode revenues and profit for that period. Your Company has set up adedicated project implementation cell to continuously review the project execution toensure that the implementation schedules and budgets are adhered to.

Human Resource Risk

Your Company’s ability to deliver value is shaped by its ability to attract,train, motivate, empower and retain the best professional talents. These abilities have tobe developed across the Company’s rapidly expanding operations. Your Companycontinuously benchmarks HR policies and practices with the best in the industry andcarries out the necessary improvements to attract and retain the best talent.

Foreign Exchange Risk

Your Company’s policy is to hedge all long-term foreign exchange risks as well asshort-term exposures within the defined parameters. The long-term foreign exchangeliability is fully hedged and hedges are on held to maturity basis. As imports (includingcapital goods import) exceeded exports, your Company has suitably hedged the differentialshort-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 ajudicious mix of fixed and floating rate debts within the stipulated parameters tomitigate the interest rate risk. Your Company continuously monitors its interest rateexposures and whenever required, uses hedging tools to minimise interest rate risk.

Commodity Price Risk

Your Company is exposed to the risk of price fluctuation on raw materials, energysources as well as finished goods. However, considering the normal correlation in theprices of raw materials and finished goods, the risk is reduced. Your Company’sstrategy of backward integration, like pulp and caustic soda for VSF, helps minimise theeffect of increase in prices of raw materials. Setting up of captive power plants helpscontrol the effect of rise in energy cost, a major cost element for cement manufacturing.

Forward integration in value added products e.g., specialty fibre in VSF, ready mixconcrete in cement, wall care putty in white cement, help reduce the impact of pricefluctuation in finished goods.

Input Availability Risk

Continued availability of natural resource for current needs and future growthrequirements is a key risk. On the energy front, indigenous coal availability continues tobe insufficient to meet the current and growing demand in the country. To meet theshortfall, your Company procures coal from various sources including imports, open marketpurchases and pet coke. Two coal blocks have also been allocated by Government of India tojoint ventures with other corporates. These coal blocks will, however, meet only a smallpart of our requirement once they are commissioned. Your Company has intensified itsefforts to increase use of various alternative fuels. Waste heat recovery systems arebeing planned to reduce energy consumption. Your Company has sufficient limestone reservesat its existing facilities. Prospecting and acquiring leases of new limestone mines arebeing undertaken on a regular basis to ensure future growth.

In the VSF business, a high level of backward integration in pulp and caustic helpsmitigate the risk of non availability of input material.

INTERNAL CONTROL SYSTEM

The Company has appropriate internal control systems for business processes, withregards to efficiency of operations, financial reporting and controls, compliance withapplicable laws and regulations, etc. Clearly defined roles and responsibilities down theline for all managerial positions have also been institutionalised. All operatingparameters are monitored and controlled. Regular internal audits and checks ensure thatresponsibilities are executed effectively. The Audit Committee of the Board of Directorsreviews the adequacy and effectiveness of internal control systems and suggestsimprovement for strengthening them, from time to time.

CONCLUSION

Your Company enjoys a leadership position in both its flagship businesses with strongcompetitive advantages and global size. They now stand at the cusp of the next phase ofgrowth. We will continue to make investments in these two businesses to furtherconsolidate our leadership position. Your Company’s strong Balance Sheet will supportits ambitious growth plans.

CAUTIONARY STATEMENT

Statement in this Management Discussion and Analysis describing theCompany’s objectives, projections, estimates, expectations or predictions may beforward looking statements within the meaning of applicable securities lawsand regulations. Actual results could differ materially from those expressed or implied.Important factors that could make a difference to the Company’s operations includeglobal and Indian demand supply conditions, finished goods prices, feedstock availabilityand prices, cyclical demand and pricing in the Company’s principal markets, changesin Government regulations, tax regimes, economic developments within India and thecountries within which the Company conducts businesses and other factors such aslitigation and labour negotiations. The Company assumes no responsibility to publiclyamend, modify or revise any forward looking statements, on the basis of any subsequentdevelopment, information or events or otherwise.