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UBS Investment Research
Grasim Industries
VSF margins likely to improve
�� Cotton prices have increased sharply in the last quarter
Average cotton prices have increased ~50% QoQ in Q3 FY11 (~66% YoY). We think
Grasim’s VSF realisations are also likely to increase in the upcoming quarters (cotton
prices and Grasim’s VSF realisations have a high correlation; in 9M FY11 cotton prices
have increased ~35% YoY). We estimate VSF to contribute about ~25% of Grasim’s
total EBITDA. VSF contributes ~30% to our valuation.
�� Lower increase in pulp prices, integrated operations to aid margin increase
Average pulp prices have also risen ~9% QoQ in Q3 FY11 (~20% YoY), that will
increase input costs for VSF business (9M FY11 pulp prices are up ~15% YoY).
However, VSF segment margins are set to increase as: 1) the increase in realisations is
likely to be higher; and 2) 75% of pulp requirements are from captive sources.
�� VSF segment has been highly profitable
Grasim’s VSF EBITDA margins (consolidated) have averaged 27% in the past
decade—it has been below 20% only in one year during this period (14% in FY09). We
forecast average EBITDA margins of ~29% over FY11-13 (30% in H1 FY11).
�� Valuation: Buy rating, with sum-of-the-parts-based PT of Rs2,770
We value: 1) the cement business at a 10% holding company discount to our price
target of Rs1,030 for UltraTech; 2) the VSF business at 5.5x one-year forward
EV/EBITDA; and 3) other businesses at 5x one-year forward EV/EBITDA. The
implied value (from Grasim’s market cap) of other businesses (excluding the Ultratech
stake at a 10% holding company discount to our price target and net cash at H1 FY11)
is US$1.3bn. Its VSF and chemical businesses have generated an EBITDA of around
US$1bn over the past five years.
Cotton prices have increased sharply
Average cotton prices have risen 50% QoQ in Q3 FY11 (66% YoY). In 9M
FY11, cotton prices have increased ~35% YoY. With such strength in cotton
prices, we expect Grasim’s VSF realisations to also rise in the upcoming
quarters (VSF realisations for Grasim have a high correlation with cotton prices).
News reports also suggest that the production in India is lower than expected for
cotton and this may lead to further upside in prices.
Highly integrated operations aid margins
Grasim claims to be among the lowest-cost producers globally, due to its
integrated operations: 1) captive raw materials—pulp (75%)—one plant in India
and two JVs in Canada; 2) caustic soda—100% captive (capacity of 258,000tpa);
3) captive power and steam (capacity of 334MW); and 4) self-managed water
supply resources.
Although increasing pulp prices (pulp prices have risen ~9% QoQ in Q3 FY11,
~20% YoY; 9M FY11 pulp prices are up ~15% YoY) negatively impact
margins, margins are likely to improve in our view as: 1) the VSF price increase
has been greater than the increase in pulp prices; and 2) only 25% of pulp needs
to be sourced outside the company.
Grasim’s VSF EBITDA margins have averaged 27% in the past decade
(including the downturn of FY09)—the performance of this business has been
quite steady. We forecast an average EBITDA margin of 29% over the next few
years (30% in H1 FY11).
Grasim’s VSF expansion plans:
Grasim currently has a capacity of 334,000tpa and is planning capacity
expansion of 156,500tpa that will come on-stream by FY13.
Greenfield project of 120,000 tons at Vilayat, Gujarat at a cost of Rs.17bn
Brownfield expansion at Harihar with a capacity of 36,500 tons and plant
upgradation at a cost of Rs.4.5bn
Grasim’s expansion plans are timely, as in FY10 it was operating at a utilisation
of about 90% (Volume CAGR has been about 5% over the last decade, with an
increasing trend—6% over the last five years and 8% over the last three years).
Grasim already has 10% of the global market share (the group has a share of
21%).
Valuation
Grasim’s market cap is around US$4.9bn and its 60.3% stake in UltraTech is
worth US$3.3bn (at our price target of Rs1,030 for UltraTech and a 10%
holding company discount). This implies a valuation of US$1.6bn for Grasim’s
remaining businesses. Grasim (excluding UltraTech) had around US$300m in
net cash/investments at end-H1 FY11. Its VSF and chemical businesses have
generated an EBITDA of around US$1bn over the past five years.
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