Grasim Industries -Cling on to the fibre of success:: Macquarie Research

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Grasim Industries
Cling on to the fibre of success
Event
 Results well above estimates: Grasim reported FY 4Q/11 earnings well
above our estimates, largely driven by sharply higher VSF (viscose staple
fibre) prices. Grasim continues to focus on growth as it expands capacity in
VSF, cement as well as the chemical division. We like the diversified nature of
the business, which provides stability to profits against pure play cement in
the current environment. We have increased our earnings estimates and have
our raised target price from Rs2488 to Rs2696. Maintain Outperform.

Impact
 Strong Q4 consolidated results: Net Sales at Rs63.9bn grew 19% QoQ,
supported by increases in both the VSF and cement divisions. EBITDA at
Rs15.4bn was up 37%QoQ, as cement business profitability increased by
Rs3.1bn and standalone increased by Rs986mn. Net profit at Rs8.7bn,
recovered from Rs5.0bn reported last quarter.
 VSF business – will get stronger: The VSF business performed quite well
with realisations up 18% YoY. Current realisations are up even further by
~26%. Since competing fibres like cotton and PSF are very strong, we see
only limited downside and are building in a 15% increase for FY12. While
standalone margins look muted due to high pulp prices, on a consolidated
basis, its margins are protected, as Grasim is 70% integrated for pulp and
thus is well hedged.
 Cement – good recovery but fundamentals remain weak: Cement
business earnings have recovered sharply as cement prices hit and all-time
high during the quarter. EBITDA margin in Q4 came in at Rs985/t, against
Rs725/t in Q3. Going forward, demand remains weak, cement prices are
starting to slip and costs have seen a jump, which makes us a bit sceptical
about the sustenance of this recovery.
 Focus on growth remains: Grasim is committed to retaining its market share
leadership in both the VSF and cement business. VSF capacity is being
increased by 46% and cement capacity by 20% by FY13-14 with capex of
US$3.2bn. Funding is no constraint, as it has a net cash balance sheet.
Earnings and target price revision
 We are increasing earnings by 29% and 22% for FY12 and FY13, respectively
and are introducing estimates for FY14 as well.
Price catalyst
 12-month price target: Rs2,696.00 based on a DCF methodology.
 Catalyst: Rally in VSF prices, recovery in cement prices
Action and recommendation
 Maintain Outperform: Grasim appears to be the only hedged play among the
large cement companies, and it is also trading at a sharp discount of 30% to
the grouip and is our preferred bet in the whole sector.