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Grasim Industries (GRAS.BO)
Buy: Cement Valuations Attractive; VSF Doing Well
Maintain Buy — Grasim offers exposure to both cement and VSF and we feel it
offers either a cheap entry into cement or cheap entry into a robust VSF outlook,
or an attractively valued combination of the two. If VSF is valued at 6x, then
cement would trade FY12E EV/t of $71, at a 35% discount to fair value. On the
other hand, if we value cement at $108/t, VSF is available at 3x. The VSF
business (35-38% of cons. EBITDA) is attractive, with entry barriers, and offers
downside protection with steady EBITDA of Rs18-20bn pa. We maintain our Buy.
Raising TP to Rs3,010 — We value its 51mtpa cement capacity using an EV/t of
$120/t for FY12E (vs. Dec 11), in line with replacement costs, but apply a 10%
holding company discount, to get a value of Rs1,598 for Grasim’s 60% holding in
UTCL. We value Grasim’s other businesses (VSF/Chemicals) at an EV/EBITDA of
6x FY12E, a 10% premium to hard commodity stocks (given its steady profit
margins), giving a value of Rs1,411. Our TP implies a FY12E EV/EBITDA of 7.3x
and P/E of 13x.
Cement: positive near term; but downside risk — UTCL plans two 4.6mtpa
brownfield capacities (Chhattisgarh & Karnataka) at a total capex of Rs56bn
(US$135/t) by early-FY14. In addition ~Rs45bn will be spent on
modernization/logistics. While cement prices have recovered lost ground recently
and should remain firm in 1QFY12, we believe there is downside risk as there is
more than adequate supply and the market is still fragmented.
VSF outlook is robust — Current capacity is 334ktpa (~11% of world) rising to
490ktpa by FY14. Margins in FY12 should be robust as prices have been hiked
16% since Jan 11 and Grasim gains from its integrated capacity. Key risk factors
include prices of cotton/PSF, pulp/caustic soda prices, and Chinese VSF output.
Downside risks — Lower cement/VSF prices/demand; capacity additions.
Grasim Industries currently lies in the Contrarian quadrant of our Value-
Momentum map with relatively weak momentum but strong value scores. It has
been a resident there for the past eight months. Compared to its peers in the
Materials sector, Grasim Industries fares better on the valuation metric but
worse on the momentum metric. Similarly, compared to its peers in its home
market of India, Grasim Industries fares better on the valuation metric but
worse on the momentum metric.
From a macro perspective, Grasim Industries has a low Beta to the region, so
can be expected to hold its own given a decline in the regional market. It is also
likely to benefit from tightening US credit spreads, falling EM yields, and a
weaker US dollar.
Grasim Industries
Valuation
We value Grasim using SOTP. We value its 51mtpa cement capacity using an
EV/tonne (a common metric used for cement companies) of US$120/t for Dec-
11E, in-line with replacement costs, but apply a 10% holding company discount
due to the changed group structure, imputing a value of Rs1,598/share for
Grasim's 60% holding in UTCL. We value Grasim in line with replacement costs
as demand growth is robust and new capacity creation is slowing down.
Grasim's other businesses (VSF/Chemicals) are valued at an EV/EBITDA of 6x
Dec-11E, a 10% premium to hard commodity businesses (given its steady
margin generating capability), giving a value of Rs1,411/share. Our Grasim
target price of Rs3,010 implies FY12E EV/EBITDA of 7.3x and P/E of 13x.
Risks
We rate Grasim Low Risk, in line with our quantitative risk-rating system, which
tracks 260-day historical share price volatility. Key downside risks to our target
price include: (1) Sharp downward rating for cement stocks due to falling
cement prices/demand; (2) Fall in prices of VSF and/or competing fibres would
negatively impact margins; and 3) Changes in the duty/tax regime to the
detriment of producers.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Grasim Industries (GRAS.BO)
Buy: Cement Valuations Attractive; VSF Doing Well
Maintain Buy — Grasim offers exposure to both cement and VSF and we feel it
offers either a cheap entry into cement or cheap entry into a robust VSF outlook,
or an attractively valued combination of the two. If VSF is valued at 6x, then
cement would trade FY12E EV/t of $71, at a 35% discount to fair value. On the
other hand, if we value cement at $108/t, VSF is available at 3x. The VSF
business (35-38% of cons. EBITDA) is attractive, with entry barriers, and offers
downside protection with steady EBITDA of Rs18-20bn pa. We maintain our Buy.
Raising TP to Rs3,010 — We value its 51mtpa cement capacity using an EV/t of
$120/t for FY12E (vs. Dec 11), in line with replacement costs, but apply a 10%
holding company discount, to get a value of Rs1,598 for Grasim’s 60% holding in
UTCL. We value Grasim’s other businesses (VSF/Chemicals) at an EV/EBITDA of
6x FY12E, a 10% premium to hard commodity stocks (given its steady profit
margins), giving a value of Rs1,411. Our TP implies a FY12E EV/EBITDA of 7.3x
and P/E of 13x.
Cement: positive near term; but downside risk — UTCL plans two 4.6mtpa
brownfield capacities (Chhattisgarh & Karnataka) at a total capex of Rs56bn
(US$135/t) by early-FY14. In addition ~Rs45bn will be spent on
modernization/logistics. While cement prices have recovered lost ground recently
and should remain firm in 1QFY12, we believe there is downside risk as there is
more than adequate supply and the market is still fragmented.
VSF outlook is robust — Current capacity is 334ktpa (~11% of world) rising to
490ktpa by FY14. Margins in FY12 should be robust as prices have been hiked
16% since Jan 11 and Grasim gains from its integrated capacity. Key risk factors
include prices of cotton/PSF, pulp/caustic soda prices, and Chinese VSF output.
Downside risks — Lower cement/VSF prices/demand; capacity additions.
Grasim Industries currently lies in the Contrarian quadrant of our Value-
Momentum map with relatively weak momentum but strong value scores. It has
been a resident there for the past eight months. Compared to its peers in the
Materials sector, Grasim Industries fares better on the valuation metric but
worse on the momentum metric. Similarly, compared to its peers in its home
market of India, Grasim Industries fares better on the valuation metric but
worse on the momentum metric.
From a macro perspective, Grasim Industries has a low Beta to the region, so
can be expected to hold its own given a decline in the regional market. It is also
likely to benefit from tightening US credit spreads, falling EM yields, and a
weaker US dollar.
Grasim Industries
Valuation
We value Grasim using SOTP. We value its 51mtpa cement capacity using an
EV/tonne (a common metric used for cement companies) of US$120/t for Dec-
11E, in-line with replacement costs, but apply a 10% holding company discount
due to the changed group structure, imputing a value of Rs1,598/share for
Grasim's 60% holding in UTCL. We value Grasim in line with replacement costs
as demand growth is robust and new capacity creation is slowing down.
Grasim's other businesses (VSF/Chemicals) are valued at an EV/EBITDA of 6x
Dec-11E, a 10% premium to hard commodity businesses (given its steady
margin generating capability), giving a value of Rs1,411/share. Our Grasim
target price of Rs3,010 implies FY12E EV/EBITDA of 7.3x and P/E of 13x.
Risks
We rate Grasim Low Risk, in line with our quantitative risk-rating system, which
tracks 260-day historical share price volatility. Key downside risks to our target
price include: (1) Sharp downward rating for cement stocks due to falling
cement prices/demand; (2) Fall in prices of VSF and/or competing fibres would
negatively impact margins; and 3) Changes in the duty/tax regime to the
detriment of producers.
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