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Grasim Industries (GRAS.BO)
Neutral
Above expectations; VSF volumes and margins surprise positively
What surprised us
Grasim Industries reported 3QFY11 consolidated net income of Rs5.0bn
(+55% qoq, -14% yoy), 6% ahead of our expectations and 12% ahead of
Reuters consensus. 3QFY11 EBITDA came in at Rs12.0bn, down 17% yoy,
primarily due to the drag in margins at Ultratech (60% held cement subsidiary).
Cement EBITDA margins were down 886bps to 20% on lower realizations
(-3% yoy) and higher fuel costs (+36% yoy). The performance of the VSF
business surprised on the upside with 4% yoy growth in volumes on the
back of demand revival in the textile industry and shortage of cotton.
While realizations were up 12% yoy, margins were down 750bps to 34%
due to higher pulp and sulphur costs (up 35%/112% yoy). The capacity
expansion projects at Vilayat and Harihar are progressing well and will
take total VSF capacity up by 47% to 490.5k by FY13 (capex: Rs21bn).
What to do with the stock
While we expect the VSF business to be strong in 4Q on sustained high volumes
and better realisations, prices of competing fibres and pulp will govern margins
of this business. We believe that the main growth driver will continue to be
cement (60% of EBIT in 9MFY11 vs. 76% in FY10) until FY13 (the next phase of
VSF capacity expansion). Management highlighted that while they believe that
the cement cycle is past the trough, margin recovery to normal levels is
expected only by FY13. We cut our EPS estimates for FY11E-FY13E by
7%/11%/5% respectively on lower Ultratech estimates. We raise our 12-month
SOTP based price target to Rs2,265 from Rs2,159 to incorporate revised net
debt and currency assumptions and retain our Neutral rating. Risks: fasterthan-expected recovery in cement prices; muted volumes in VSF and cement.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Grasim Industries (GRAS.BO)
Neutral
Above expectations; VSF volumes and margins surprise positively
What surprised us
Grasim Industries reported 3QFY11 consolidated net income of Rs5.0bn
(+55% qoq, -14% yoy), 6% ahead of our expectations and 12% ahead of
Reuters consensus. 3QFY11 EBITDA came in at Rs12.0bn, down 17% yoy,
primarily due to the drag in margins at Ultratech (60% held cement subsidiary).
Cement EBITDA margins were down 886bps to 20% on lower realizations
(-3% yoy) and higher fuel costs (+36% yoy). The performance of the VSF
business surprised on the upside with 4% yoy growth in volumes on the
back of demand revival in the textile industry and shortage of cotton.
While realizations were up 12% yoy, margins were down 750bps to 34%
due to higher pulp and sulphur costs (up 35%/112% yoy). The capacity
expansion projects at Vilayat and Harihar are progressing well and will
take total VSF capacity up by 47% to 490.5k by FY13 (capex: Rs21bn).
What to do with the stock
While we expect the VSF business to be strong in 4Q on sustained high volumes
and better realisations, prices of competing fibres and pulp will govern margins
of this business. We believe that the main growth driver will continue to be
cement (60% of EBIT in 9MFY11 vs. 76% in FY10) until FY13 (the next phase of
VSF capacity expansion). Management highlighted that while they believe that
the cement cycle is past the trough, margin recovery to normal levels is
expected only by FY13. We cut our EPS estimates for FY11E-FY13E by
7%/11%/5% respectively on lower Ultratech estimates. We raise our 12-month
SOTP based price target to Rs2,265 from Rs2,159 to incorporate revised net
debt and currency assumptions and retain our Neutral rating. Risks: fasterthan-expected recovery in cement prices; muted volumes in VSF and cement.
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