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Grasim Industries (GRASIM)
Cement
VSF drives outperformance. Grasim reported net income of Rs5 bn compared to our
estimate of Rs4.1 bn primarily led by robust performance from the VSF business, which
gained from an improved demand environment leading to higher volume sales at better
realizations. Revival of cement prices in South further aided margin expansion. Grasim
currently trades at adjusted EV/ton of US$90 and EV/EBITDA of 4.4X on FY2012E. We
maintain our ADD rating and a revised target price of Rs2,600/share.
Earnings surprise positively aided by strong VSF realizations
Grasim reported revenue of Rs53.8 bn (21% qoq, 12% yoy), operating profit of Rs11.2 bn (55%
qoq, -19% yoy) and net income of Rs5 bn (55% qoq) against our estimate of Rs47.7 bn, Rs9.8 bn
and Rs4.1 bn, respectively. We note that net income numbers are not comparable on yearly basis
due to dilution of ownership in the cement business in favor of Grasim shareholders.
Higher-than-estimated revenues and EBITDA were primarily on account of (1) robust performance
in VSF business with higher-than-estimated growth in volumes and realizations, and (2) revenue
contribution of Rs1.9 bn from Star Cement (UltraTech’s Middle Eastern subsidiary) not factored in
our earnings estimates.
Robust operational quarter for VSF business
Strong demand environment on the back of shortage of cotton fiber (substitute) and general
revival of textile industry resulted in a robust operational quarter for VSF business. VSF business
reported revenues of Rs11.3 bn (11% qoq, 17% yoy) driven by robust growth in volumes and
improved realizations. Volumes at 84,621 tons grew 25% sequentially while realizations at
Rs123,060/ton improved 6% qoq. We expect VSF demand and prices to remain strong in coming
quarters as cotton prices remain firm—30% qoq at Rs115/kg in 3QFY11.
Maintain ADD with a revised target price of Rs2,600/share
We maintain our ADD rating with a revised target price of Rs2,600/share. On comparative
valuations on FY2012E, our assigned valuation implies 5.1X EV/EBITDA for the VSF business. We
have revised our EPS estimate to Rs224/share (previously Rs195/share) in FY2011E and to
Rs261/share (previously Rs239/share) in FY2012E as we adjust for (1) improved VSF volumes and
realizations, (2) contribution from Star Cement, and (3) weakness in cement volumes.
We value the cement business at 6X EV/EBITDA on FY2012E EBITDA implying an EV/ton of
US$103/ton on FY2012E production and factor an additional ‘holding-company’ discount for 60%
holding in UTCEM. We value the steady cash streams from VSF and allied chemicals business using
DCF model.
Cement— pricing improves as South leads the way
Grasim’s cement subsidiary UltraTech reported standalone revenues of Rs37.1 bn (2.2%
yoy, 16% qoq), operating profits of Rs7.1 bn (-31% yoy, 74% qoq) and net income of
Rs3.2 bn (176% qoq). Volumes at 9.8 mn tons (0.1% yoy, 7.7% qoq) were in line with
our estimates while average realizations at Rs3,791/ton were marginally lower than our
estimate of Rs3,619/ton. Higher-than-estimated EBITDA was primarily on account of (1)
lower overhead expenses of Rs6.8 bn against our estimate of Rs7.3 bn and (2) lower
power and fuel cost (Rs914/ton against our estimate of Rs950/ton) yielding a profitability
of Rs722/ton against our estimate of Rs668/ton. Operating margins improved to 19.1%
in 3QFY11 from 12.7% in 2QFY11 driven by improved pricing environment.
VSF – shortage of substitute (cotton) propels VSF demand and prices
Grasim’s VSF division reported revenues of Rs11.3 bn (17% yoy, 11% qoq) and
operating profit of Rs3.9 bn (-3.7% yoy, 42% qoq). Strong demand environment on the
back of shortage of cotton (substitute) and general revival of textile industry resulted in a
robust operational quarter for VSF business. VSF volumes were further boosted by
resumption of Nagda plant which operated at full capacity during the quarter. Volumes
at 84,621 tons grew 25% sequentially while realizations at Rs123,060/ton improved 6%
qoq.
We note that prices of both VSF and cotton have been steadily increasing in 3QFY11.
Average prices of VSF increased from ~Rs140/kg in 2QFY11 to Rs151/kg in 3QFY11 (7%
qoq) while cotton prices jumped 30% sequentially to Rs115/kg in 3QFY11. Sharp
increase in prices of cotton driven by shortage of cotton is likely to keep VSF prices stiff in
near term, thus yielding better realizations in coming quarters.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Grasim Industries (GRASIM)
Cement
VSF drives outperformance. Grasim reported net income of Rs5 bn compared to our
estimate of Rs4.1 bn primarily led by robust performance from the VSF business, which
gained from an improved demand environment leading to higher volume sales at better
realizations. Revival of cement prices in South further aided margin expansion. Grasim
currently trades at adjusted EV/ton of US$90 and EV/EBITDA of 4.4X on FY2012E. We
maintain our ADD rating and a revised target price of Rs2,600/share.
Earnings surprise positively aided by strong VSF realizations
Grasim reported revenue of Rs53.8 bn (21% qoq, 12% yoy), operating profit of Rs11.2 bn (55%
qoq, -19% yoy) and net income of Rs5 bn (55% qoq) against our estimate of Rs47.7 bn, Rs9.8 bn
and Rs4.1 bn, respectively. We note that net income numbers are not comparable on yearly basis
due to dilution of ownership in the cement business in favor of Grasim shareholders.
Higher-than-estimated revenues and EBITDA were primarily on account of (1) robust performance
in VSF business with higher-than-estimated growth in volumes and realizations, and (2) revenue
contribution of Rs1.9 bn from Star Cement (UltraTech’s Middle Eastern subsidiary) not factored in
our earnings estimates.
Robust operational quarter for VSF business
Strong demand environment on the back of shortage of cotton fiber (substitute) and general
revival of textile industry resulted in a robust operational quarter for VSF business. VSF business
reported revenues of Rs11.3 bn (11% qoq, 17% yoy) driven by robust growth in volumes and
improved realizations. Volumes at 84,621 tons grew 25% sequentially while realizations at
Rs123,060/ton improved 6% qoq. We expect VSF demand and prices to remain strong in coming
quarters as cotton prices remain firm—30% qoq at Rs115/kg in 3QFY11.
Maintain ADD with a revised target price of Rs2,600/share
We maintain our ADD rating with a revised target price of Rs2,600/share. On comparative
valuations on FY2012E, our assigned valuation implies 5.1X EV/EBITDA for the VSF business. We
have revised our EPS estimate to Rs224/share (previously Rs195/share) in FY2011E and to
Rs261/share (previously Rs239/share) in FY2012E as we adjust for (1) improved VSF volumes and
realizations, (2) contribution from Star Cement, and (3) weakness in cement volumes.
We value the cement business at 6X EV/EBITDA on FY2012E EBITDA implying an EV/ton of
US$103/ton on FY2012E production and factor an additional ‘holding-company’ discount for 60%
holding in UTCEM. We value the steady cash streams from VSF and allied chemicals business using
DCF model.
Cement— pricing improves as South leads the way
Grasim’s cement subsidiary UltraTech reported standalone revenues of Rs37.1 bn (2.2%
yoy, 16% qoq), operating profits of Rs7.1 bn (-31% yoy, 74% qoq) and net income of
Rs3.2 bn (176% qoq). Volumes at 9.8 mn tons (0.1% yoy, 7.7% qoq) were in line with
our estimates while average realizations at Rs3,791/ton were marginally lower than our
estimate of Rs3,619/ton. Higher-than-estimated EBITDA was primarily on account of (1)
lower overhead expenses of Rs6.8 bn against our estimate of Rs7.3 bn and (2) lower
power and fuel cost (Rs914/ton against our estimate of Rs950/ton) yielding a profitability
of Rs722/ton against our estimate of Rs668/ton. Operating margins improved to 19.1%
in 3QFY11 from 12.7% in 2QFY11 driven by improved pricing environment.
VSF – shortage of substitute (cotton) propels VSF demand and prices
Grasim’s VSF division reported revenues of Rs11.3 bn (17% yoy, 11% qoq) and
operating profit of Rs3.9 bn (-3.7% yoy, 42% qoq). Strong demand environment on the
back of shortage of cotton (substitute) and general revival of textile industry resulted in a
robust operational quarter for VSF business. VSF volumes were further boosted by
resumption of Nagda plant which operated at full capacity during the quarter. Volumes
at 84,621 tons grew 25% sequentially while realizations at Rs123,060/ton improved 6%
qoq.
We note that prices of both VSF and cotton have been steadily increasing in 3QFY11.
Average prices of VSF increased from ~Rs140/kg in 2QFY11 to Rs151/kg in 3QFY11 (7%
qoq) while cotton prices jumped 30% sequentially to Rs115/kg in 3QFY11. Sharp
increase in prices of cotton driven by shortage of cotton is likely to keep VSF prices stiff in
near term, thus yielding better realizations in coming quarters.
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