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Grasim Industries: VSF rises again; we see 6-months of safety
VSF prices hiked by 4%; 1st discount to cotton in long time
Grasim has reportedly hiked prices of viscose staple fiber (VSF) by Rs6/kg (+4%)
in Mar ‘11. This hike follows a series of earlier increases through FY11, starting in
Oct ’10. For the first time in a decade, however, VSF prices appear to be at a
discount (8-10%) to local cotton prices versus the long-term average of a 40-45%
premium vs. cotton. Compared with polyester (PSF), VSF prices are currently at
~30% premium versus LT average of ~24% premium and peak premium of ~75%.
FY12 earnings up; PO unchanged; we see 6 mths of safety
We expect recent higher VSF prices to sustain for the next 6 months and have
lifted FY12 earnings by 10%. Post recent record cotton prices, we conservatively
assume that cotton prices will ease during 1H FY12 and VSF prices will ease with
a lag. Our sum-of-the-parts-based PO is unchanged at Rs2,510/sh and implies a
de-rating of VSF business to 7.5x FY12-PE vs. 9x earlier.
Cotton continues to spiral; brightest before dusk?
Cotton prices are up ~35-40% in last 2 months versus ~19% rise in polyester and
~10% rise in VSF prices. Industry organizations like the International Cotton
Advisory Committee expect cotton acreage to rise in the upcoming sowing season
and expect cotton inventory to rise over Jul ’11-Aug ’12.
Prefer Grasim over pure cement plays on valuations
Our sum-of-the-parts-based PO for Grasim values its cement business at US$95-
100 per ton, i.e., 20% below the current valuation of UltraTech (Rs1008.7,
Underperform). For the VSF business, we have factored a de-rating to allow for a
potential downturn in the next 6 mths. On these assumptions, and after factoring a
20% holdCo discount, we expect ~9% stock upside in Grasim. Maintain Neutral.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Grasim Industries: VSF rises again; we see 6-months of safety
VSF prices hiked by 4%; 1st discount to cotton in long time
Grasim has reportedly hiked prices of viscose staple fiber (VSF) by Rs6/kg (+4%)
in Mar ‘11. This hike follows a series of earlier increases through FY11, starting in
Oct ’10. For the first time in a decade, however, VSF prices appear to be at a
discount (8-10%) to local cotton prices versus the long-term average of a 40-45%
premium vs. cotton. Compared with polyester (PSF), VSF prices are currently at
~30% premium versus LT average of ~24% premium and peak premium of ~75%.
FY12 earnings up; PO unchanged; we see 6 mths of safety
We expect recent higher VSF prices to sustain for the next 6 months and have
lifted FY12 earnings by 10%. Post recent record cotton prices, we conservatively
assume that cotton prices will ease during 1H FY12 and VSF prices will ease with
a lag. Our sum-of-the-parts-based PO is unchanged at Rs2,510/sh and implies a
de-rating of VSF business to 7.5x FY12-PE vs. 9x earlier.
Cotton continues to spiral; brightest before dusk?
Cotton prices are up ~35-40% in last 2 months versus ~19% rise in polyester and
~10% rise in VSF prices. Industry organizations like the International Cotton
Advisory Committee expect cotton acreage to rise in the upcoming sowing season
and expect cotton inventory to rise over Jul ’11-Aug ’12.
Prefer Grasim over pure cement plays on valuations
Our sum-of-the-parts-based PO for Grasim values its cement business at US$95-
100 per ton, i.e., 20% below the current valuation of UltraTech (Rs1008.7,
Underperform). For the VSF business, we have factored a de-rating to allow for a
potential downturn in the next 6 mths. On these assumptions, and after factoring a
20% holdCo discount, we expect ~9% stock upside in Grasim. Maintain Neutral.
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