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Grasim Industries
Stock Update
VSF price hiked by Rs6 per kg
Grasim Industries has increased the price of viscose staple fibre (VSF) by Rs6 per
kg from the beginning of March 2011. This is the second price hike implemented
by the company during the ongoing quarter (ie Q4FY2011) so far and with this the
realisation of the company now stands at around Rs135 per kg. The present level
of realisation is at an historic high due to the strong demand for VSF products in
both the domestic and the global market. The demand for VSF is supported by the
high price of competing fibres like cotton.
Impact: Earnings for FY2012 could be upgraded by 3-4%, we maintain our
estimates till Q4FY2011 results
VSF is the core business for Grasim Industries after the demerger of its cement
business into UltraTech Cement. If the price hike undertaken by the company
sustains then it will result in the upgradation of the company’s stand-alone FY2012
earnings estimates by around 3-4%. On a consolidated basis, the move will lead to
a nearly 2% upgradation of the FY2012 earnings estimates. However, we would
like to wait for its Q4FY2012 results. Hence, we maintain our earnings estimates
for the company with consolidated EPS estimates of Rs220 and Rs262 for FY2011
and FY2012 respectively.
Outlook on VSF prices going ahead: Expected to remain healthy for a couple
of quarters
VSF prices have started displaying an upward trend since the last one year mainly
on account of a surge in the volume. In Q4FY2010 the company had recorded its
highest ever volume (85,714 tonne) and in Q3FY2011 the volume of the company
reached close to that level. Hence, the price hike is supported by a strong volume
growth which is expected to continue its momentum for a few more quarters. In
addition to the robust volume growth, presently VSF appears to be priced at a
discount to the local cotton as compared to the long-term average of close to 40%
premium vs cotton. Hence looking at the present discount to the cotton price and
the continued momentum in the volume growth we believe VSF prices would remain
healthy for the coming couple of quarters.
Expansion of VSF capacity on track
Looking at the strong demand environment for VSF
products the company is increasing its VSF capacity by
(a) setting up a greenfield project of 120,000 tonne per
annum (TPA) at Vilayat, Gujarat at a cost of Rs1,690 crore
and (b) undertaking a brownfield expansion at Harihar
with a capacity of 36,500TPA at a cost of Rs449 crore.
The project is likely to commence production by FY2013.
The funding of the new capacity will be met through a
mix of internal accruals and borrowings. The present debt:
equity ratio stands at 0.38 which ensures a strong balance
sheet and comfortable debt raising to fund the capital
expenditure.
Valuation
Given the improvement in the global demand environment
for VSF, the performance of the division continues to shine
in terms of volume as well as realisation. Going ahead,
we believe the profitability of the division will remain
healthy due to the rising price of the competing fibres.
However, its cement division is under pressure due to
poor cement offtake and unfavorable demand-supply
scenario. Further, cost inflation in terms of the rising price
of imported coal remains a key concern as the company
procurers about 35% of its total requirement through
imports. On the valuation front we continue to value the
stock using the sum-of-the-parts valuation methodology
and maintain our price target at Rs2,500. We also maintain
our Hold rating on the stock. At the current market price
the stock trades at a price/earnings ratio of 8.8x
discounting its FY2012 estimated EPS.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Grasim Industries
Stock Update
VSF price hiked by Rs6 per kg
Grasim Industries has increased the price of viscose staple fibre (VSF) by Rs6 per
kg from the beginning of March 2011. This is the second price hike implemented
by the company during the ongoing quarter (ie Q4FY2011) so far and with this the
realisation of the company now stands at around Rs135 per kg. The present level
of realisation is at an historic high due to the strong demand for VSF products in
both the domestic and the global market. The demand for VSF is supported by the
high price of competing fibres like cotton.
Impact: Earnings for FY2012 could be upgraded by 3-4%, we maintain our
estimates till Q4FY2011 results
VSF is the core business for Grasim Industries after the demerger of its cement
business into UltraTech Cement. If the price hike undertaken by the company
sustains then it will result in the upgradation of the company’s stand-alone FY2012
earnings estimates by around 3-4%. On a consolidated basis, the move will lead to
a nearly 2% upgradation of the FY2012 earnings estimates. However, we would
like to wait for its Q4FY2012 results. Hence, we maintain our earnings estimates
for the company with consolidated EPS estimates of Rs220 and Rs262 for FY2011
and FY2012 respectively.
Outlook on VSF prices going ahead: Expected to remain healthy for a couple
of quarters
VSF prices have started displaying an upward trend since the last one year mainly
on account of a surge in the volume. In Q4FY2010 the company had recorded its
highest ever volume (85,714 tonne) and in Q3FY2011 the volume of the company
reached close to that level. Hence, the price hike is supported by a strong volume
growth which is expected to continue its momentum for a few more quarters. In
addition to the robust volume growth, presently VSF appears to be priced at a
discount to the local cotton as compared to the long-term average of close to 40%
premium vs cotton. Hence looking at the present discount to the cotton price and
the continued momentum in the volume growth we believe VSF prices would remain
healthy for the coming couple of quarters.
Expansion of VSF capacity on track
Looking at the strong demand environment for VSF
products the company is increasing its VSF capacity by
(a) setting up a greenfield project of 120,000 tonne per
annum (TPA) at Vilayat, Gujarat at a cost of Rs1,690 crore
and (b) undertaking a brownfield expansion at Harihar
with a capacity of 36,500TPA at a cost of Rs449 crore.
The project is likely to commence production by FY2013.
The funding of the new capacity will be met through a
mix of internal accruals and borrowings. The present debt:
equity ratio stands at 0.38 which ensures a strong balance
sheet and comfortable debt raising to fund the capital
expenditure.
Valuation
Given the improvement in the global demand environment
for VSF, the performance of the division continues to shine
in terms of volume as well as realisation. Going ahead,
we believe the profitability of the division will remain
healthy due to the rising price of the competing fibres.
However, its cement division is under pressure due to
poor cement offtake and unfavorable demand-supply
scenario. Further, cost inflation in terms of the rising price
of imported coal remains a key concern as the company
procurers about 35% of its total requirement through
imports. On the valuation front we continue to value the
stock using the sum-of-the-parts valuation methodology
and maintain our price target at Rs2,500. We also maintain
our Hold rating on the stock. At the current market price
the stock trades at a price/earnings ratio of 8.8x
discounting its FY2012 estimated EPS.
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