Grasim - holding discount to narrow; Buy:: Anand Rathi

Visit http://indiaer.blogspot.com/ for complete details �� ��


Grasim
VSF on strong footing; holding discount to narrow; Buy
 Good 2QFY11. Strong realisation in VSF and high ‘other income’
were key growth drivers in Grasim’s 2QFY11 standalone results.
We expect a better VSF performance (for 2HFY11) and narrowing
of the holding-company discount (50% now) to lead to a re-rating.
We raise our target price, chiefly due to the change in value of
investment. Maintain Buy.
 VSF – good times ahead. VSF realisation rose 10% yoy. Volumes
however fell 9% due to a shutdown at the Nagda plant for most of
Jul ’10 due to water shortage. Strong growth in realisations arose
due to the global cotton shortage. PBIT margin slid to 28.8%
(38.5% yoy, 32.5% qoq) mainly due to higher pulp prices. We
expect a better outlook for 2HFY11.
 Cement affected by lower realisations. Revenue from the cement
business (UltraTech) fell 9% yoy, due to an 18% dip in realisations
and an 8% rise in volumes. PBIT/ton was `285 (`1,110 yoy).
 Expansion. Grasim is upbeat about growth prospects of the VSF
division. It revised its expansion plans at Vilayat to 120,000 tpd and
36,500 tpd at Harihar (capex: Rs21bn). It plans to expand cement
capacity by 9.2m tons (Chhattisgarh, Karnataka) at `56bn capex.
 Outlook and change in estimates. Grasim expects cement
demand to rise 10% annually in the next five years. It expects prices
and volumes to rise in 2HFY11. We have revised our estimates to
factor in the de-merger of the cement business.
 Valuations. Our fair price of `2,680 is based on a 30% holdingcompany
discount for UltraTech and other investments. We value
VSF and chemicals at 6x and 4x FY12e EV/EBITDA respectively.