Grasim Industries: 2QFY11 Result Update:: Angel Broking

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For 2QFY2011, Grasim Industries (Grasim) witnessed 58.9% yoy de-growth in
consolidated net profit due to poor performance by its cement business
(represented by subsidiary, UltraTech), which reported top-line and operating
profit decline of 10.5% and 60.5% yoy, respectively. The VSF business posted
reasonably good operating profit of `273cr, albeit down 23%. The company has
completed acquisition of the UAE-based ETA Star (ETA) at US $140/tonne. We
have assigned the VSF business a higher multiple of 5.5x (5x earlier) over FY2012
estimates due better earnings visibility with demand likely to remain stable in the
short to medium term following fast recovery in the textile sector in emerging
markets coupled with decline in global cotton production. We upgrade the stock
to Accumulate from Neutral.




Plant shutdown impacts VSF business: The division posted a reasonably good
performance despite the 25 days (8 days in 2QFY2010) shut down of the Nagda
plant due to water shortage. The business reported 9% decline in sales volume to
67,488MT, but realisations increased 11% to `116,465/tonne, enabling it to
report a marginal 1% growth in top-line. However, higher pulp prices
impacted OPM, which fell to 31.8% and operating profit stood at `273cr.


Outlook and Valuation: At current levels, the stock trades at a P/E of 9.5x and
EV/EBITDA of 4.9x on FY2012 estimates. On SOTP basis, we have valued the
company’s 60.3% stake in Ultratech at an EV/tonne of US $110 after providing
20% holding company discount, to arrive at a value of `1,500/share. We have
assigned the VSF business a higher multiple of 5.5x (5x earlier) over FY2012
estimates due to better earnings visibility. We upgrade the stock to Accumulate
from Neutral with an SOTP Target Price of `2,412.


Conference call – Key highlights
􀂄 The company said that the all-India cement demand grew 5% during the
quarter as against 13% in 2QFY2010. The northern region was the worst
affected posting a decline in demand of 1%. The eastern, western and
southern markets reported 13%, 4% and 8% growth, as against 24%, 8% and
4% respectively, reported in 2QFY2010.
􀂄 The reduction in lead distance helped the company maintain its freight costs,
despite higher diesel prices.
􀂄 Grasim has completed the acquisition of ETA at a cost of US $140/tonne. The
company has indicated that the ETA would make EBITDA of around `400/ton.
The financials of ETA would be consolidated with effect from October 1, 2010.
􀂄 Work on the brown-field expansion at Malkhed and Raipur with capacity of
9.2mtpa (including 95MW of thermal power plant and 5 split grinding units)
at an approximate cost of `5,600cr is expected to begin as planned in
4QFY2011.
􀂄 Grasim has revised capacity expansion of its Vilayat project to 1,20,000
tonnes from 80,000 tonnes earlier.
􀂄 The company stated that it has coal inventory, which would last till end of
FY2011. The company had purchased the coal at a cost of
US $110/tonne from the international market.


Outlook and Valuation
We expect Grasim’s top-line to register moderate 4.7% CAGR over FY2010-12E
primarily due to low demand and pricing pressure in its cement business.
However, VSF demand is likely to remain stable in the short to medium term on the
back of improved demand fallowing the fast recovery in the textile sector in
emerging markets coupled with the decline in global cotton production. The
demand is also expected to be boosted by use of VSF in various allied applications
like non-woven, etc. On the margin front however, an increase in input prices
(pulp and sulphur) could exert pressure.
At current levels, the stock trades at a P/E of 9.5x and an EV/EBITDA of 4.9x on
FY2012E estimates. We have valued the company’s 60.3% stake in Ultratech at an
EV/tonne of US $110/tonne after providing 20% holding company discount, to
arrive at a value of `1,500/share. We have assigned the VSF business a higher
multiple of 5.5x (5x earlier) over FY2012E estimates, due to the better earnings
visibility. We have arrived at a SOTP-based Target Price of `2,412 and upgrade
the stock to Accumulate from Neutral.