Grasim Industries Net profit above estimates : Emkay

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Grasim Industries

Net profit above estimates- EBIDTA disappoints

ACCUMULATE

CMP: Rs 2,240                                       Target Price: Rs 2,600

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n     Grasims’s Q2FY11 net profit at Rs2.79bn (-5.2%yoy) ahead of estimates (led by high other income earned through dividends from subsidiaries). Core VSF EBIDTA below estimates

n     Revenue decline 1.3%qoq due to 1.2% fall in VSF realization and lower volumes due to plant shutdowns. EBITDA for the quarter at Rs2.64bn declined 22.1%yoy and 12.4%qoq

n     Expect VSF performance to improve in subsequent quarter driven by better realisations & pick up in volumes. Introducing earnings post de-merger of cement business

n     Upgrade price target to Rs2600 driven by upgrade in Ultratech’s Target price and growing VSF demand. Stock implying 44% holding co discount-Maintain ACCUMULATE

Standalone revenues decline 1.3% qoq

Standalone revenues at Rs9.33bn (our estimate of Rs9.37bn) for the quarter registered

a decline of 1.3% qoq, as VSF revenues remained flat at Rs8.55bn with realizations

declining 1.2% on sequential basis. Chemical division revenues at Rs1.2bn posted a

growth a 1.1% qoq. On a restated basis revenues grew 1.5% as 10.7% growth in VSF

realisation was negated by 8.8% decline in VSF volumes, which got impacted by a

25day plant shutdown at Nagda (as compared to just 8 days in Q2FY10).

Cost pressures drag EBIDTA down by 22.1%yoy- below estimates

EBITDA for the quarter at Rs2.64bn declined 22.1%yoy and 12.4%qoq, below our

estimates of Rs3.04bn.The quarter witnessed severe cost pressures as P&F costs

increased 7.1% qoq to Rs 1.13bn.This was due to higher imported coal contract prices

which rose from USD76 to USD110 increasing the cost. Employee costs increased

17.2%qoq whereas other expenses increase 18.5%qoq thereby exerting further

pressure on margins. EBIDTA margins at 28.3% declined 857 bps yoy and 359 bps qoq.

Higher pulp prices & plant shutdown led to VSF EBIDTA decline of 23.1%

With increase in prices of pulp and volumes being lower impacted by plant shutdown,

EBITDA from VSF division at Rs2.72bn (our estimates of Rs3.11bn) registered a decline

of 23.1%yoy and 10.3% qoq. EBITDA from chemical division at Rs320 mn was above

our estimates of Rs278mn, growth of 4% qoq.

Net Profit down 79.2%qoq

Net profit at Rs2.79bn declined 5.2%yoy but was higher than our estimates of Rs2.19bn

due to higher other income that the company received through dividends from

subsidiaries. Depreciation charges increased 22.5% yoy whereas interest charges fell

26.6% yoy.