GRASIM INDUSTRIES Aided by other income :: Edelweiss

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

GRASIM INDUSTRIES Aided by other income


􀂄 Revenue below estimates; PAT up on account of higher other income
Grasim Industries’ (Grasim) Q2FY11 standalone revenues were below expectation
by 8%, but PAT was higher at INR 2.8 bn (our estimate INR 2.15 bn) on account
of higher–than-expected dividend income. Consolidated revenue and PAT were
below expectation on account of sub par performance in the cement business.
Grey cement volumes dipped 12% and realisation slipped INR 20/bag to INR
3,025/t sequentially. Lower white cement volumes were compensated by higher
realisations Q-o-Q. Management is confident about increasing demand and
maintaining price hikes. Expansion plans are on track.
􀂄 VSF: Lower volumes, lower realizations; increase in pulp cost
VSF realization in Q2FY11 was flat Q-o-Q, but increased 11% Y-o-Y to INR 116/kg
led by cotton shortage globally, further accentuated by damage to cotton crops in
Pakistan. VSF volumes declined 9% Y-o-Y primarily on account of extended
shutdown of the Nagda plant on late arrival of monsoon. VSF PBIDT margins
declined Y-o-Y from 41.4% to ~32.0% on account of high cost of pulp which has
now stabilised. Realizations were flat Y-o-Y for caustic soda; however, volumes
declined 5% Y-o-Y on account of shutdown, leading to PBIT decline.
􀂄 Fresh capex in both cement and VSF to maintain leadership
Grasim has revised its expansion plans and is now setting up an 1,20,000 tpa
(earlier 80,000 tpa) greenfield VSF plant in Vilayat (Gujarat) and 36,500
brownfield expansion at Harihar (Karnataka) at a total capex of INR 21 bn, which
is likely to come on stream by FY13 end. The company also plans to strengthen
its backward integration for caustic soda by setting up a 1,82,500 tpa plant at
Vilayat for its VSF facilities. Also, Grasim is planning addition of 25 mtpa cement
capacity over the five next years, of which, it intends to start work on 9.2 mtpa
brownfield expansion by Q4FY11 in Karnataka and Chattisgarh. Replacement
cost of these projects is high at USD 135/t, partly due to investment in housing
and railway siding.
􀂄 Outlook and valuations: Valuations provide comfort; maintain ‘HOLD’
We remain cautious on the cement industry on account of oversupply leading to
continued pressure on prices. Regards Grasim, we are positive on the VSF and
chemical business. While Grasim will be the holding company for the cement
business, we believe adjusting for 20% holding company discount, the stock is
fairly valued at the current level. Hence, we maintain our ‘HOLD’
recommendation on the stock. On relative return basis the stock is rated ’Sector
Outperformer’.