Grasim: Firing on both cylinders; maintain Buy :: Motilal oswal,

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Grasim: Firing on both cylinders; maintain Buy
Volume growth
 We expect cement volume growth for
subsidiary, UltraTech to improve to 12.2%
CAGR over FY11-13 as against 6.7% CAGR
over FY09-11.
 We estimate VSF business volume growth
at 10.4% CAGR, driven by new capacity
addition in FY13.
 Grasim is investing to expand capacity of
both cement (~9m tons) and VSF (~156,500
tons) to cater to future growth.
Market/business mix
 UltraTech's incremental volumes are expected
to be driven by the North and South. However,
its product mix is expected to improve, with
lower contribution from clinker, as new grinding
unit at Gujarat begins operations by FY12.
 Cement business contribution to pro-rata
consolidated revenue is estimated at ~65%
in FY12 (v/s 57% in FY11), with VSF
contributing the balance 35%.
Cost and profitability
 We expect cement business profitability to
improve by Rs290/ton QoQ in 4QFY11 to
Rs1,004/ton, and by Rs80/ton in CY11 to
Rs869/ton.
 VSF business profitability is likely to improve
by 100bp over FY11-13, driven by strong VSF
prices (assume Rs7/kg increase).
 We expect Grasim's consolidated EPS to
grow at 20% CAGR over FY11-13.

Valuation and view
 Outlook for the VSF business has improved
considerably. This coupled with improving
short-term outlook for the cement business
augurs well for Grasim.
 The stock quotes at attractive valuations of
8.1x FY12E consolidated EPS, 1.3x FY12E
BV and at an EV of 4.5x FY12E EBITDA.
Implied valuation of the cement business is
US$86/ton.
 Maintain Buy, with a target price of Rs3,154
(SOTP based, valuing economic interest in
business at 10x EV/EBITDA and 20% holdco
discount, and VSF at 4x EV/EBITDA).


Grasim: Firing on both cylinders; maintain Buy
 Cement still contributes over 55% to
consolidated EBITDA: After consolidating all
cement assets into UltraTech, Grasim is
perceived as a holding company with limited
interest in cement. While its economic interest
in the cement business has reduced, it still
contributes ~65% consolidated pro-rata
revenues and over 55% of its EBITDA.
 Positive outlook for VSF business…:
Outlook for Grasim's VSF business has
improved considerably, driven by strong cotton
and PSF prices, reflecting in ~Rs21/kg increase
in VSF prices in the last three months and Rs28/
kg in six months to Rs144/kg. Our FY12
estimates assume VSF realizations of Rs132/
kg. We estimate VSF business PBITDA margin
to improve by 150bp in FY12 to 37%.
 …reflecting in capex: Grasim has revised
upwards its capacity addition in VSF from
80,000 tons (greenfield) to 156,500 tons
(greenfield + brownfield). This is supplemented
by caustic capacity addition of 182,500 units. It
would be investing Rs29b to augment its capacity
by 47% to 490,475 tons by FY13


Grasim: Valuation and view
 Outlook for the VSF business has improved
considerably. This coupled with improving shortterm
outlook for the cement business augurs
well for Grasim.
 Demerger of the cement business has triggered
a de-rating of the stock and it currently trades
at implied holding company discount of ~50%
to UltraTech.
 The stock quotes at attractive valuations of 8.1x
FY12E consolidated EPS, 1.3x FY12E BV and
at an EV of 4.5x FY12E EBITDA. Implied
valuation of the cement business is US$87/ton.
 Maintain Buy, with a target price of Rs3,154
(SOTP based, valuing economic interest in
cement business at 10x EV/EBITDA and 20%
hold-co discount, and VSF at 4x EV/EBITDA)