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Grasim Industries -VSF prices strong; cement prices stable
Having met with management today at our 15th Annual India Investor
Conference in New Delhi, these are some of our takeaways....
VSF prices to stay strong; cement prices to be stable
Grasim does not foresee any major threat to VSF prices over next 6 months.
Domestic VSF prices are pegged at a discount to international prices in order to
support long-term demand. In the cement business as well, Grasim expects
prices to be stable despite high overcapacity. The top-5 cement producers
control 60-65% of the industry capacity and focus on preserving balance sheet
health is high.
Positive margin outlook for VSF; cement to stay volatile
Pulp prices for Grasim have been relatively steady; the company sources 75-80%
of its pulp requirement from captive sources. This coupled with strong VSF prices
should drive margin expansion. In the cement business, margins may be hurt by
rising input costs.
Cement demand should recover
Grasim sees the recent slowdown in cement demand as an aberration. The
company expects demand growth to recover in line with its historical multiplier at
1.2x GDP growth.
Capacity expansions to be ready by FY14
Grasim is expanding VSF capacity by 47% (156,000tpa) and cement capacity by
17% (9.2mtpa). The expansions are expected to be ready by end-FY13/earlyFY14.
Price objective basis & risk
Grasim (GRSJF / GRSJY)
We have a price objective of Rs2510 (GDR of US$54.92) for Grasim. We value
the company's dominant cement business at a 20% discount to the industry's
current replacement cost of US$120-125/ton. The 20% discount is in line with the
average (rather than trough) discount witnessed through the previous downturn
(1997-2002). The VSF business is pegged at an FY12E PE of about 9x, broadly
on par with Lenzing, which is one of the few listed VSF names globally, outside of
the Aditya Birla group. A sharp slowdown in VSF demand and an unforeseen rise
in energy prices for the cement business present downside risks to our PO.
Upside risk could stem from strong and sustained rational pricing behaviour of
cement producers across the industry and an unforeseen further rise in cotton
and PSF prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Grasim Industries -VSF prices strong; cement prices stable
Having met with management today at our 15th Annual India Investor
Conference in New Delhi, these are some of our takeaways....
VSF prices to stay strong; cement prices to be stable
Grasim does not foresee any major threat to VSF prices over next 6 months.
Domestic VSF prices are pegged at a discount to international prices in order to
support long-term demand. In the cement business as well, Grasim expects
prices to be stable despite high overcapacity. The top-5 cement producers
control 60-65% of the industry capacity and focus on preserving balance sheet
health is high.
Positive margin outlook for VSF; cement to stay volatile
Pulp prices for Grasim have been relatively steady; the company sources 75-80%
of its pulp requirement from captive sources. This coupled with strong VSF prices
should drive margin expansion. In the cement business, margins may be hurt by
rising input costs.
Cement demand should recover
Grasim sees the recent slowdown in cement demand as an aberration. The
company expects demand growth to recover in line with its historical multiplier at
1.2x GDP growth.
Capacity expansions to be ready by FY14
Grasim is expanding VSF capacity by 47% (156,000tpa) and cement capacity by
17% (9.2mtpa). The expansions are expected to be ready by end-FY13/earlyFY14.
Price objective basis & risk
Grasim (GRSJF / GRSJY)
We have a price objective of Rs2510 (GDR of US$54.92) for Grasim. We value
the company's dominant cement business at a 20% discount to the industry's
current replacement cost of US$120-125/ton. The 20% discount is in line with the
average (rather than trough) discount witnessed through the previous downturn
(1997-2002). The VSF business is pegged at an FY12E PE of about 9x, broadly
on par with Lenzing, which is one of the few listed VSF names globally, outside of
the Aditya Birla group. A sharp slowdown in VSF demand and an unforeseen rise
in energy prices for the cement business present downside risks to our PO.
Upside risk could stem from strong and sustained rational pricing behaviour of
cement producers across the industry and an unforeseen further rise in cotton
and PSF prices.
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