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GRASIM INDUSTRIES
Improved performance from VSF segment
VSF realisations increase 5.7% Q-o-Q; further growth expected
With production resuming normalcy and improved demand, VSF volumes rose
25% Q-o-Q (water shortage in the previous quarter impacted volumes).
Realisation growth, at 5.7% Q-o-Q, helped PBIDT margins improve ~250bps at
34.3%. With average realisations expected to increase by over 10% in Q4FY11,
PBIDT margins are expected to improve further. On the back of JV in China
returning to profitability and improved performance of pulp JVs, consolidated
PBIDT of the segment increased 35% Q-o-Q, to INR 4,283 mn. Due to the
improved performance of the VSF segment, EBITDA and PAT at INR 11.2 bn and
5.01 bn were above estimates.
Cement performance better due to increase in realisations
Though domestic sales volume remained muted, growing 6.2% Q-o-Q (and 1.3%
Y-o-Y), the 8.5% Q-o-Q increase in realisations (due to the group’s 26%
exposure to South, where prices increased ~25%) helped the segment post
PBIDT margin of 19.5% against 14.4% in Q2FY11. Though in the near term,
cement prices in India may remain firm, we except sharp declines in the lean
season leading to declines in the PBIDT margins of this segment.
Capex plan: Massive expansion in cement by FY14
The 120k tpa VSF greenfield project at Vilayat (Gujarat) and 36k tpa brownfield
project at Harihar (Karnataka) are on track for completion in FY13. Total outlay
for VSF expansion is INR 21.5 bn. As part of its backward integration initiative,
capex of INR 7.7 bn for putting up a 182k tpa caustic plant and 60 MW CPP is
also planned. In cement, Grasim has indicated placing orders for major
equipment for 9.2 mn tpa capacity expansion and other logistic and
modernisations initiatives. Total project cost for cement is ~INR 100 bn, slated
for completion in early FY14.
Outlook and valuations: Reasonable; maintain ‘HOLD’
Though we maintain our negative stance on the cement sector (owing to
capacity overhang), current valuations of 4.6x FY12E EV/EBITDA appear
reasonable. We value Grasim on SOTP basis. Its 60.3% stake in UltraTech is
valued at USD 108 EV/tonne, with 15% holding company discount. VSF is valued
at 5.5x FY12E EV/EBITDA. Derived price target for the stock is INR 2,600 per
share, representing ~10% upside potential. We maintain ‘HOLD/ Sector
Outperformer.
Company Description
Headquartered in Mumbai, Grasim is the flagship company of the Aditya Birla Group, and is
one of the largest private sector companies in India. Incorporated in 1947, the company
commenced operations in 1948 as a textile manufacturer. Over the years, it has become a
diversified conglomerate with presence in four business segments—VSF, cement, chemicals,
and textiles. VSF and cement are the main segments, contributing ~90% to the company’s
revenues and operating profits. Post the merger of its cement business, Grasim holds
60.3% in UltraTech which will have the cement business of Grasim standalone and the
recently acquired ETA Star Cement of UAE. The total installed capacity is now ~52 mn tpa.
Investment Theme
With estimated positive outlook for VSF in the near term and current valuations appearing
reasonable, we maintain our Hold recommendation on the stock.
Key Risks
• Prices of VSF decline sharply over the next few quarters impacting demand.
• Sharp decline in cement prices and poor industry demand
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
GRASIM INDUSTRIES
Improved performance from VSF segment
VSF realisations increase 5.7% Q-o-Q; further growth expected
With production resuming normalcy and improved demand, VSF volumes rose
25% Q-o-Q (water shortage in the previous quarter impacted volumes).
Realisation growth, at 5.7% Q-o-Q, helped PBIDT margins improve ~250bps at
34.3%. With average realisations expected to increase by over 10% in Q4FY11,
PBIDT margins are expected to improve further. On the back of JV in China
returning to profitability and improved performance of pulp JVs, consolidated
PBIDT of the segment increased 35% Q-o-Q, to INR 4,283 mn. Due to the
improved performance of the VSF segment, EBITDA and PAT at INR 11.2 bn and
5.01 bn were above estimates.
Cement performance better due to increase in realisations
Though domestic sales volume remained muted, growing 6.2% Q-o-Q (and 1.3%
Y-o-Y), the 8.5% Q-o-Q increase in realisations (due to the group’s 26%
exposure to South, where prices increased ~25%) helped the segment post
PBIDT margin of 19.5% against 14.4% in Q2FY11. Though in the near term,
cement prices in India may remain firm, we except sharp declines in the lean
season leading to declines in the PBIDT margins of this segment.
Capex plan: Massive expansion in cement by FY14
The 120k tpa VSF greenfield project at Vilayat (Gujarat) and 36k tpa brownfield
project at Harihar (Karnataka) are on track for completion in FY13. Total outlay
for VSF expansion is INR 21.5 bn. As part of its backward integration initiative,
capex of INR 7.7 bn for putting up a 182k tpa caustic plant and 60 MW CPP is
also planned. In cement, Grasim has indicated placing orders for major
equipment for 9.2 mn tpa capacity expansion and other logistic and
modernisations initiatives. Total project cost for cement is ~INR 100 bn, slated
for completion in early FY14.
Outlook and valuations: Reasonable; maintain ‘HOLD’
Though we maintain our negative stance on the cement sector (owing to
capacity overhang), current valuations of 4.6x FY12E EV/EBITDA appear
reasonable. We value Grasim on SOTP basis. Its 60.3% stake in UltraTech is
valued at USD 108 EV/tonne, with 15% holding company discount. VSF is valued
at 5.5x FY12E EV/EBITDA. Derived price target for the stock is INR 2,600 per
share, representing ~10% upside potential. We maintain ‘HOLD/ Sector
Outperformer.
Company Description
Headquartered in Mumbai, Grasim is the flagship company of the Aditya Birla Group, and is
one of the largest private sector companies in India. Incorporated in 1947, the company
commenced operations in 1948 as a textile manufacturer. Over the years, it has become a
diversified conglomerate with presence in four business segments—VSF, cement, chemicals,
and textiles. VSF and cement are the main segments, contributing ~90% to the company’s
revenues and operating profits. Post the merger of its cement business, Grasim holds
60.3% in UltraTech which will have the cement business of Grasim standalone and the
recently acquired ETA Star Cement of UAE. The total installed capacity is now ~52 mn tpa.
Investment Theme
With estimated positive outlook for VSF in the near term and current valuations appearing
reasonable, we maintain our Hold recommendation on the stock.
Key Risks
• Prices of VSF decline sharply over the next few quarters impacting demand.
• Sharp decline in cement prices and poor industry demand
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