ACCUMULATE Grasim Industries Q3FY1 Results above estimates; Target: Rs 2,730: Emkay

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Grasim Industries

Results above estimates-Maintain ACCUMULATE

ACCUMULATE

CMP: Rs 2,359                                        Target Price: Rs 2,730

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n     Grasims’s Q3FY11 net profit at Rs2.83bn (+7.9%yoy) ahead of estimates (led by high other income earned through dividends from subsidiaries)

n     Revenue (Rs 12.1 bn) grew 17.8% yoy driven by better VSF volumes (+4.1% yoy) and improved realizations (+12.3 % yoy). EBITDA  at Rs3.64bn declined 6.7%yoy but improved 38% qoq

n     Higher pulp prices led to decline of 3.7% yoy in VSF EBIDTA (Rs 3.88bn). However improved realizations resulted in margin expansion of 252 bps qoq to 34.4%

n     At CMP stock implying holdco discount of ~43%. Standalone biz significantly undervalued with implied multiples of 2.5x EV/EBITDA which are unwarranted. Maintain ACCUMULATE

Standalone revenues grow 17.8% yoy

Standalone revenues at Rs12.13bn (our estimate of Rs11.9bn) registered a growth of

17.8% yoy and 30.1% qoq, as VSF revenues grew 17.3% yoy to Rs11.3bn with

realizations improving 12.3% yoy and 5.7% qoq. Chemical division revenues at

Rs1.47bn posted a growth a 21.6% yoy and 23% qoq.

EBITDA at Rs3.64 bn , down 6.7% yoy but improved 38% qoq

EBITDA at Rs3.64bn declined 6.7%yoy as higher pulp prices resulted in 3.7% decline in

VSF EBITDA (Rs3.8 bn). VSF margins contracted by 753bps yoy to 34.4%. However on

sequential basis margins expanded by 252 bps driven by better production and

improved VSF realization. We would like to highlight that though on standalone basis

VSF EBITDA declined by 3.7% yoy ( due to higher pulp prices) , on consolidated basis

it grew by 2.1% to Rs4.28 bn on account of better profitability from Pulp JVs.

P&F costs(Rs1.4 bn) increased 19.7% yoy and 24% qoq due to higher imported coal

contract prices which rose from USD110/t (in Q2FY11) to USD125/t. Freight costs

increased 34.6% yoy and 34%qoq (Rs142 mn)due to increase in rail freight whereas

other expenses increased 40%yoy thereby exerting further pressure on margins. Overall

EBIDTA margins at 29.9% declined 789 bps yoy but improved 166bps qoq.

Net Profit grew 8% yoy

Net profit at Rs2.83bn grew by 8% yoy , higher than our estimates of Rs2.64bn due to

higher other income that the company received through dividends from subsidiaries.

Depreciation charges increased 18% yoy whereas interest charges increased by

5.3%yoy.

 

Consolidated revenues decline 5% yoy- net profit declines 59%

On account of improved performance of VSF division, Grasims consolidated revenues for

the quarter at Rs53.84bn grew 12%yoy and 21% qoq. Consolidated EBITDA at Rs11.2bn

declined 19% yoy on account of 24.4%decline in EBITDA from cement division. Similarly

APAT after minority interest at Rs5.02bn declined 30% yoy.

Segmental Performance

VSF

¾ Volumes at 84,621mnt grew 4.1% yoy and 25.4%qoq as Nagda Plant (which affected

volumes last quarter due to shutdown for 25 days) remained functional throughout the

quarter.

¾ Realizations are at Rs123.06/kg which have improved 12.3% yoy driven by cotton

shortage globally which has further deteriorated by damage of crops in Pakistan due to

floods and has resulted in improved demand for VSF.

¾ We would like to highlight that though on standalone basis VSF EBITDA declined by

3.7% yoy to Rs3.8bn (due to higher pulp prices), on consolidated basis it grew by 2.1%

to Rs4.28 bn on account of better profitability from Pulp JVs.

¾ EBITDA margins at 34.4 were lower by 753 bps from their highest margins of Q3FY10

but improved by 252 bps sequentially on account of improved realizations.

Chemical

¾ Sales volumes at 67136 tonnes grew 9.5%yoy and 30.1% qoq

¾ However realizations at Rs18125/t though improved 10%yoy declined by 6.6%

sequentially

¾ Resultant sales at Rs 1.47 bn (our estimate of Rs1.36bn) grew 22% yoy, while EBITDA

at Rs314 mn (lower than our estimates of Rs381 mn), grew by 11% yoy but declined by

2.8%qoq.

Standalone Capex

Grasim has planned investments of Rs33.79 bn over next three years in VSF and Chemical

businesses. This includes Greenfield project of 120,000 tons at Vilayat, Gujarat at a cost of

Rs.1,690 Crores, which is expected to start commercial operation by FY2013 and

Brownfield expansion at Harihar with a capacity of 36,500 tons and plant upgradation at a

cost of Rs.449 Crores

Cement business Capex

Grasim has planned a total cement capex of Rs101.56 bn out of which UTCL has an

ongoing capex plan of Rs100 bn which will be spent over the next 3 years on augmenting

its grinding capacity in Gujarat, installing waste heat recovery systems and setting up of

packaging terminals across locations. Also the capex plans entails setting up of

clinkerization plants at Chhattisgarh and Karnataka. Consequent to these expansions total

cement capacity additions will be 9.2 mtpa with Overall capacity reaching 61.2mtpa

Grasim’s Standalone Business significantly undervalued – FY12E implied

EV/EBIDTA at 2.5X

At current levels the stock is implying holding company discount of ~43%. Assigning a 25%

holdco discount to all investments of Grasim, at current levels, Grasim's standalone

business looks significantly undervalued with the implied multiples of 2.5x FY12

EV/EBITDA. We believe such pessimistic valuations are unwarranted, given that peak VSF

margins are ahead for us. Maintain our ACCUMULATE rating on the stock with a revised

price target of Rs2730.