Grasim Industries- In-line results; JPMorgan

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Grasim Industries Ltd
Overweight
GRAS.BO, GRASIM IN
In-line results; Strong VSF performance to support
earnings



• Earnings in line with estimates: GRASIM reported 2Q FY11 EBITDA
of Rs7.8B, in line with our estimate. Consolidated PAT stood at Rs3.2B,
also in line.
• While VSF volumes were lower in 2Q, given late rains, the VSF
outlook remains strong: GRASIM reported weak standalone and
consolidated earnings driven by lower VSF volumes. VSF had a higherthan-
expected impact from the late arrival of rains (Nagda plant was shut
down for 25 days compared to eight days last year). However, the VSF
outlook remains strong given a) stronger cotton prices due to crop
damage in key cotton growing countries, and b) stronger demand from
VSF. GRASIM highlighted that it did increase VSF prices by Rs3/kg
(~2%) on Oct. 1 and the outlook for VSF was also strong. Costs on a
sequential basis are unlikely to see any significant move. We expect
VSF earnings and margins to remain elevated over the next few quarters.
• VSF growth plans: GRASIM announced a greenfield VSF plant of
0.12MT capacity at a total cost of Rs16.9B, brownfield expansion for a
capacity of 0.036MT for total cost of Rs4.49B, and also has plans for
higher caustic capacity for captive use in the VSF segment.
• Update on Star Cement acquisition: UltraTech completed the
acquisition of the Middle East-based Star Cement (3MT capacity with
implied acquisition price of $140/MT). The acquisition will be
consolidated into Grasim’s results starting in 3Q FY11. According to
management, the company is operating at a utilization rate of 80+% and
will generate EBITDA of ~Rs400/MT (current selling price in the region
is ~$65/MT).
• Remain OW with revised PT of Rs2,550: We remain OW on GRASIM
with a raised PT of Rs2,550. We expect the continued strong VSF
business (on the back of higher cotton prices) to provide earnings
support. While cement earnings in the cement subsidiary are likely to
remain volatile, we expect overall margins to be higher than the industry
average for the cement subsidiary (UltraTech Cement, N) given its pan-
India presence. Key risks remain usage of cash, further re-organization.