Macquarie Research:: Grasim Industries -Defensive play : target: Rs2,488

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Grasim Industries: Defensive play
Event
 Results slightly above estimates: Grasim reported 3Q FY 3/11 earnings,
which were 7% higher than our estimates largely driven by price increases in
cement and VSF.  Grasim continues to focus on growth as it expands
capacity in VSF, cement as well as chemical division. We like the diversified
nature of the business, which provides stability to profits against pure play
cement in the current environment. Maintain Outperform.

Impact
 Strong Q3 consolidated results: Net Sales at Rs53.8bn grew 21.3% QoQ,
supported by increase in both VSF and cement divisions. EBITDA at
Rs11.2bn is up 55% QoQ as cement business profitability increased by
Rs3bn and standalone increased by Rs997mn. Net profit at Rs5.0bn,
recovered from Rs3.2bn reported last quarter.
 VSF business – recovery in volume and prices: VSF business performed
quite well with volume up 4% YoY and realisations up 12% YoY. While
standalone margins look muted because of high pulp prices during 3Q, on a
consolidated basis, its margins are protected as Grasim is 70% integrated for
pulp and is well hedged. VSF prices have seen further increases in December
and January, and we expect 4Q earnings to see this impact.
 Cement – muted recovery: Cement business earnings recovered from the
lows in 2Q, with increasing volume and realisations helping earnings.
However, this recovery was driven by supplier discipline and is on a shaky
footing given weak fundamentals and is unlikely to sustain.
 Expansions to maintain its dominance:  The company’s VSF capacity is
already constrained and is running on 99% utilisation. Its expected expansion
by 156,500t by FY13 would be welcome relief.  Though cement utilisation is
pretty low at only 78%, Grasim is trying to maintain its market share and
needs about 5mtpa expansion every year. It is also increasing capacity in the
chemicals business by 182,500tpa.  Its total outlay of capex is $2.8bn, and we
don’t expect Grasim to face any issue in financing this.

Earnings and target price revision
 No change.

Price catalyst
 12-month price target: Rs2,488.00 based on a DCF methodology.
 Catalyst: Rally in VSF prices, recovery in cement prices

Action and recommendation
 Maintain Outperform: Grasim appears to be the only hedged play among the
large cement companies, it is also trading at a sharp discount of 30% to them
and is our preferred play in the whole sector. We are reviewing our sector call
and will come back with further details post results of major cement
companies