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Grasim Industries (GRAS.BO)
Buy Equity Research
Above expectations: Cement and VSF see margin recovery
What surprised us
Grasim Industries reported 4QFY11 consolidated net income of Rs8.6bn (+32%
yoy, +72% qoq), about 30% ahead of our and Reuters consensus estimates. At
the operating level, 4QFY11 consolidated EBITDA came in at Rs16.5bn, about
12% ahead of our and consensus estimates, primarily due to better margins in
both cement and VSF businesses. Cement EBITDA margins were up 243bp
qoq to 24% on better pricing, resulting in pass-through of cost inflation. The
VSF business continued to report strong operating performance (EBITDA
margin of 34%) on robust pricing trends on the back of renewed demand and
surge in prices of competing fibres due to cotton shortage and rising costs of
all fibres. The company announced the acquisition of a one-third stake in the
Group JV, which acquired Swedish speciality pulp producer Domsjo Fabriker
AB, with an investment of Rs2.8bn to be funded from existing cash balance of
Rs36bn (on a stand-alone basis). This would enhance the captive availability of
pulp for the company post completion of ongoing brownfield expansions at
Harihar and Vilayat, in our view.
What to do with the stock
We fine-tune our FY12E-13E EPS -0.5% to 1% after incorporating FY11
results. At 4.7X FY12E EV/EBITDA, Grasim is trading at a 15% discount to
its mid-cycle of 5.5X. This would imply that either (1) the VSF business is
trading at a 60% discount to peers, despite better EBITDA margins and
returns; or (2) the implied holding company discount for the cement
business is a steep 55%, both of which appear unjustified. We reiterate our
Buy rating with a 12-m SOTP-based TP of Rs2,984.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Grasim Industries (GRAS.BO)
Buy Equity Research
Above expectations: Cement and VSF see margin recovery
What surprised us
Grasim Industries reported 4QFY11 consolidated net income of Rs8.6bn (+32%
yoy, +72% qoq), about 30% ahead of our and Reuters consensus estimates. At
the operating level, 4QFY11 consolidated EBITDA came in at Rs16.5bn, about
12% ahead of our and consensus estimates, primarily due to better margins in
both cement and VSF businesses. Cement EBITDA margins were up 243bp
qoq to 24% on better pricing, resulting in pass-through of cost inflation. The
VSF business continued to report strong operating performance (EBITDA
margin of 34%) on robust pricing trends on the back of renewed demand and
surge in prices of competing fibres due to cotton shortage and rising costs of
all fibres. The company announced the acquisition of a one-third stake in the
Group JV, which acquired Swedish speciality pulp producer Domsjo Fabriker
AB, with an investment of Rs2.8bn to be funded from existing cash balance of
Rs36bn (on a stand-alone basis). This would enhance the captive availability of
pulp for the company post completion of ongoing brownfield expansions at
Harihar and Vilayat, in our view.
What to do with the stock
We fine-tune our FY12E-13E EPS -0.5% to 1% after incorporating FY11
results. At 4.7X FY12E EV/EBITDA, Grasim is trading at a 15% discount to
its mid-cycle of 5.5X. This would imply that either (1) the VSF business is
trading at a 60% discount to peers, despite better EBITDA margins and
returns; or (2) the implied holding company discount for the cement
business is a steep 55%, both of which appear unjustified. We reiterate our
Buy rating with a 12-m SOTP-based TP of Rs2,984.
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