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We believe the recent 15% correction (on the back of falling cotton and cement
prices) provides a good entry point. Implied cement valuations of $69/MT, net
cash balance sheet and a VSF business which should still deliver EBITDA of
+Rs13bn makes GRASIM a good defensive in the Indian materials space, in our
view. We are OW with PT of Rs2700, implying ~30% upside from current levels.
VSF: price declines from life time high prices- A given, but VSF still on
track to deliver significantly above mid cycle profitability: Given the spot
cotton price correction, VSF price correction is normal in our view. We expect
demand to remain muted over the next 2 quarters as channel de-stocking leads
to lower volumes. We believe VSF prices have declined by Rs12/kg from peak
levels of Rs158/kg and current prices are back to March quarter average prices
of Rs146/kg. As we had highlighted in our Q4 update on Grasim (Strong cash
generation to continue; Remain OW, Increase PT, dated 11th May, 2011), our
EPS is based on VSF EBITDA/MT of Rs42/kg compared to Q4 levels of
Rs60/kg. Our forecasts for average VSF realizations in FY12E are even lower
than current levels and hence we do not see downside risks to our VSF
estimates unless we have continued end demand destruction. While Q1 is
seasonally weak (because of water shortage), we expect VSF profitability to
pick up sequentially from Q3FY12 levels.
Implied cement valuations at $69/MT: At current stock price we estimate
implied cement valuations are at $69/MT compared to replacement costs of
$120/MT. Implied discount to UTCEM's current price is 40%, while discount
based on JPM’s PT of UTCEM is 50%. We built in holding company discount
of 20% given the fact that GRASIM still owns 60% of UTCEM and is not a
minority shareholder.
Net cash balance sheet makes GRASIM a defensive at current levels in the
Indian Materials space: GRASIM's net cash balance sheet (standalone balance
sheet as per our estimates has net cash of Ra27bn) and VSF EBITDA at Rs14bn
ensure cash generation would remain strong. We believe GRASIM is a good
defensive at current levels in the Indian materials space. JPM’s consolidated
EPS estimates are 6% below consensus for FY12E
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We believe the recent 15% correction (on the back of falling cotton and cement
prices) provides a good entry point. Implied cement valuations of $69/MT, net
cash balance sheet and a VSF business which should still deliver EBITDA of
+Rs13bn makes GRASIM a good defensive in the Indian materials space, in our
view. We are OW with PT of Rs2700, implying ~30% upside from current levels.
VSF: price declines from life time high prices- A given, but VSF still on
track to deliver significantly above mid cycle profitability: Given the spot
cotton price correction, VSF price correction is normal in our view. We expect
demand to remain muted over the next 2 quarters as channel de-stocking leads
to lower volumes. We believe VSF prices have declined by Rs12/kg from peak
levels of Rs158/kg and current prices are back to March quarter average prices
of Rs146/kg. As we had highlighted in our Q4 update on Grasim (Strong cash
generation to continue; Remain OW, Increase PT, dated 11th May, 2011), our
EPS is based on VSF EBITDA/MT of Rs42/kg compared to Q4 levels of
Rs60/kg. Our forecasts for average VSF realizations in FY12E are even lower
than current levels and hence we do not see downside risks to our VSF
estimates unless we have continued end demand destruction. While Q1 is
seasonally weak (because of water shortage), we expect VSF profitability to
pick up sequentially from Q3FY12 levels.
Implied cement valuations at $69/MT: At current stock price we estimate
implied cement valuations are at $69/MT compared to replacement costs of
$120/MT. Implied discount to UTCEM's current price is 40%, while discount
based on JPM’s PT of UTCEM is 50%. We built in holding company discount
of 20% given the fact that GRASIM still owns 60% of UTCEM and is not a
minority shareholder.
Net cash balance sheet makes GRASIM a defensive at current levels in the
Indian Materials space: GRASIM's net cash balance sheet (standalone balance
sheet as per our estimates has net cash of Ra27bn) and VSF EBITDA at Rs14bn
ensure cash generation would remain strong. We believe GRASIM is a good
defensive at current levels in the Indian materials space. JPM’s consolidated
EPS estimates are 6% below consensus for FY12E
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