Grasim Industries - 2QFY11 Hit By Weak Cement Prices; Citi

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



Grasim Industries (GRAS.BO)
Alert: 2QFY11 Hit By Weak Cement Prices; VSF Picking Up
 Sharp drop in 3Q PAT — Grasim’s consolidated 3Q PAT fell 59% YoY to Rs3.2bn
(10% below our estimates of Rs3.6bn). Both VSF (Viscose Staple Fibre) and
Cement (together 96% of sales; 90% of EBITDA) had a difficult quarter, though
the EBITDA drop was sharper for cement (-59% YoY) relative to VSF (-11% YoY).
Overall EBITDA fell 51% YoY and EBITDA margin fell by half at 16.2% vs 31.7% in
2QFY10.
 Cement (73% of sales; 54% of EBITDA) — Margins in 2Q fell sharply at UltraTech
Cement (ULTC; Grasim’s 60% cement subsidiary; 49m tpa in India) to 14.4% from
32.5% last year. The drop was largely due to an 18% YoY drop in realizations to
Rs3,021/t, with sharper declines in western and southern India (together 51% of
cement sales). Margins were also impacted by higher coal prices – especially
imported coal: ~35% of usage; US$110/t vs US$76/t. Cement volumes rose 8%
YoY to 9mt. We expect cement prices to fall in 4QFY11 due to the sharp capacity
hike in FY10 and a long tail of ~30 players, beyond the top 5 (55% of capacity).
 UAE Cement plant acquisition completed — ULTC has just completed the
acquisition of ETA Star Cement (at EV/t of US$125/t) with 3m tpa based in the
UAE, Bahrain and Bangladesh. Its numbers will be included in ULTC from Oct
2010 onwards. The plant is currently operating at ~80% utilization and sells
cement at US$65/t.
 VSF (23% of sales; 36% of EBITDA) — VSF margins for Grasim fell 10% to 31.8%
compared to a very strong showing last year (margin 41.4%). The fall was mainly
due to lower volumes (an extended monsoon) and a surge in pulp prices. Volumes
fell 9% to 67,500t, and prices rose 11% to Rs116,500/t. The VSF outlook is
positive, due to higher cotton prices (shortage further worsened by floods in
Pakistan) and as pulp prices are stable. Grasim has raised VSF prices by 3% and
further hikes could take place. Grasim has enhanced its VSF expansion plan –
capacity will now rise by 47% to 491ktpa by FY13 (from 334ktpa now) vs an
earlier plan to hike capacity by 24% to 414k tpa.
 Attractive valuations — We have just upgraded Grasim to Buy (1L) as it offers a
valuation dissonance versus other cement majors (trading at CY11 EV/t of
US$125-163/t). Grasim trades at a CY11E EV/t of US$82 vs replacement costs of
US$120/t. Its VSF business (30-35% of consolidated EBITDA) offers some
downside protection as it should generate steady returns of Rs14-16bn pa.