BNP Paribas: Grasim Industries: 2QF11 result preview

Grasim Industries: 2QF11 result preview
􀂃 VSF outlook improves driven by firming cotton prices.
􀂃 Cons. F2Q11 EBITDA (down30% q/q) on 16% drop in cement ASPs.
􀂃 Grasim plans to spend INR14.5b for VSF & INR101b for Cement.
􀂃 We value Grasim on a SoTP basis at INR2,208.00/shr.
VSF outlook brightens
International cotton prices have increased 29.5% since August 2010 due to floods in
Pakistan, inventory replenishment, and harvest delays in China and India.
Demand supply imbalances should keep cotton prices firm which will eventually
support Viscose Stable Prices (VSF). We model a 2.5%y/y increase in VSF ASPs
for Grasim while maintaining flat volume growth for FY11 due to uncertain global
growth. Despite rising wood pulp and sulphur costs, we believe the company
can maintain current margins driven by captive sourcing of pulp.
Previewing Grasim’s 2QF11 results
We expect Grasim to report standalone sales of INR10b(up7%q/q) and
EBITDA of INR 3.2b (up7%q/q) driven by improving VSF realisations &
flattish VSF vol. growth. On a consol. basis, Grasim is negatively
impacted by the higher-than-expected decline in cement prices in the
southern & western regions in 2QF11 & higher opex. We expect the
company to report sales of INR41.8 b (down 17%q/q) and EBITDA of INR
9.2b (down 30% q/q) on 16%q/q fall in cement realisations, higher power
and fuel costs and higher other expenses. Net profit of INR3.9b (down
50%y/y and 32%q/q) will also be impacted by higher minority interest.
Capex plans in VSF and Cement to protect market share
Grasim expects to spend INR115b of capex over the next three years.
The company is setting up an 80,000MT of VSF plant at Vilayat in
Gujarat which is expected to be commissioned by FY13. The total capex
for the VSF business is expected to be INR14.5 bn, of which Rs5.5 bn is
expected to be spent in FY11. Grasim plans to spend INR45b capex on
it’s cement subsidiaries. The company also plans to spend INR56b for
setting clinkerization plants at Chhattisgarh and Karnataka.
Valuation - Maintain HOLD
We value Grasim using a SOTP methodology. Our SoTP based target
price of Grasim stands at INR2,208.00/shr. We value Grasim’s VSF
business at 4.0x FY12 EBITDA (contributes INR424/shr), Investments
and cash at book, and cement business at 6.0x FY12 EBITDA
(contributes INR1596/shr) applying a 20% holding company discount to
the cement business. We believe the stock is no longer trading at a
significant holding company discount and hence reiterate a Buy-on-dips
strategy on improving VSF outlook and recovering cement ASPs in
south.