Grasim- VSF on strong footing, upgrade estimates; maintain Buy: Anand Rathi

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Grasim
VSF on strong footing, upgrade estimates; maintain Buy
Grasim’s 3QFY11 results beat our estimates due to its strong VSF
realization, expected to be firm in the near term. We raise our
FY11e/ FY12e net profit 14%/12%, factoring in strong VSF
performance; we introduce FY13 estimates. Robust VSF outlook
and narrowing of the holdco discount (45% now) are short term
triggers. We raise our target price to `2,750 from `2,680 earlier.

 VSF – Good times to continue. VSF realization/volume rose
13%/4% yoy. Strong realization growth was due to global cotton
shortage, revival in textiles and higher Chinese VSF prices. PBIT
margin improved 330bps qoq to 32% mainly on higher realization; it
fell 700bps yoy on higher input costs. Management expects cost
pressures to continue (mainly from pulp) in FY12.
 Cement improves. Revenue from the cement business (UltraTech)
grew 16% qoq due to rise of 7% in realization and 8% in volume.
EBITDA/ton (blended) was ~`710 (vs. `440 qoq).
 Expansion. Grasim is expanding VSF capacity (capex: `21bn) at
Vilayat by 120,000tpd and at Harihar by 36,500tpd. It will expand
cement capacity by 9.2m tons (Chhattisgarh, Karnataka) at `56bn.
 Outlook. Grasim expects cement demand to rise 8-10% from
FY12. Despite rising costs, it expects cement, VSF margins to pick
up in 4QFY11 on the back of higher realization and volume. VSF
prices are expected to be firm in FY12, though with some volatility.
 Valuation and risks. Our SOTP target price of `2,750 is based on
a 25% holdco discount for investments and 6x FY12e EV/EBITDA
for VSF. Key risk: Lower realization of cement and VSF.