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Grasim has reduced VSF prices by Rs10/kg(13% fall from peak) tracking falling cotton (29% fall
from peak) and polyester staple fibre prices (20% fall from peak). Over the last 7 years, VSF
prices have been at 55% premium to cotton, while currently it is just 14%.
Grasim reduces VSF prices by around Rs10/kg to Rs136/kg
Tracking falling cotton and polyester staple fibre prices, Grasim w.e.f 1st July has reduced
prices of viscose staple fibre by Rs10/kg or 7%. This is second sharp reduction done by
Grasim in the last few months, taking the total price decline to 13% from the peak levels
recorded in March 2011.
Cotton prices which at a point had crossed VSF prices have also falling sharply. Cotton prices
which touched a high of Rs165/kg in March 2011, have fallen to Rs118/kg recording a sharp
fall of Rs29% from the peak.
PSF prices have also corrected from peak of Rs115.75/kg to Rs95/kg.
VSF prices still have the lowest premium to cotton prices in last 7 years.
VSF prices have always traded a premium to cotton prices. While, the premium has varied
over the years, the average premium of VSF prices to cotton have been around 55%.
Currently despite the sharp fall in cotton prices (29% from the peak), they are still at just a
14% premium to VSF prices.
VSF prices are critically influenced by cotton prices, as the blended yarn producers alter the
composition of usage of cotton, polyester fibre and VSF depending on the relative price
differential.
While, VSF relative prices with other competiting fibres remain lower than long term averages,
the general weakness in textile demand due to higher prices is impacting demand for VSF,
which we believe has been one of the main reasons for Grasim to reduce prices sharply.
VSF margins to decline through FY12
Grasim recorded a peak VSF margin of 38.4% in Q4FY11, when it averaged a realisation of
Rs145/kg. After the recent price reduction, Grasim current realisations are around Rs136/kg.
We have assumed a EBITDA margin of 34% or a EBITDA/mt of Rs46000 in FY12. In
Q4FY12, recorded a EBITDA/mt of Rs59970/mt. However, if prices continue to decline there
could be downsides to our estimates.
Grasim stock is cheap as its holdings in group companies at market prices is equal to
Rs2080/share (nearly equal to current stock price). While we value them giving holding
company discount at Rs1349.5/share. Its VSF business is extremely profitable business
through cycles (average EBITDA margins in the last 12 years is at 31%) and generates strong
returns (55% ROCE). We maintain our Buy recommendation the stock despite the headwinds to its VSF business
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Grasim has reduced VSF prices by Rs10/kg(13% fall from peak) tracking falling cotton (29% fall
from peak) and polyester staple fibre prices (20% fall from peak). Over the last 7 years, VSF
prices have been at 55% premium to cotton, while currently it is just 14%.
Grasim reduces VSF prices by around Rs10/kg to Rs136/kg
Tracking falling cotton and polyester staple fibre prices, Grasim w.e.f 1st July has reduced
prices of viscose staple fibre by Rs10/kg or 7%. This is second sharp reduction done by
Grasim in the last few months, taking the total price decline to 13% from the peak levels
recorded in March 2011.
Cotton prices which at a point had crossed VSF prices have also falling sharply. Cotton prices
which touched a high of Rs165/kg in March 2011, have fallen to Rs118/kg recording a sharp
fall of Rs29% from the peak.
PSF prices have also corrected from peak of Rs115.75/kg to Rs95/kg.
VSF prices still have the lowest premium to cotton prices in last 7 years.
VSF prices have always traded a premium to cotton prices. While, the premium has varied
over the years, the average premium of VSF prices to cotton have been around 55%.
Currently despite the sharp fall in cotton prices (29% from the peak), they are still at just a
14% premium to VSF prices.
VSF prices are critically influenced by cotton prices, as the blended yarn producers alter the
composition of usage of cotton, polyester fibre and VSF depending on the relative price
differential.
While, VSF relative prices with other competiting fibres remain lower than long term averages,
the general weakness in textile demand due to higher prices is impacting demand for VSF,
which we believe has been one of the main reasons for Grasim to reduce prices sharply.
VSF margins to decline through FY12
Grasim recorded a peak VSF margin of 38.4% in Q4FY11, when it averaged a realisation of
Rs145/kg. After the recent price reduction, Grasim current realisations are around Rs136/kg.
We have assumed a EBITDA margin of 34% or a EBITDA/mt of Rs46000 in FY12. In
Q4FY12, recorded a EBITDA/mt of Rs59970/mt. However, if prices continue to decline there
could be downsides to our estimates.
Grasim stock is cheap as its holdings in group companies at market prices is equal to
Rs2080/share (nearly equal to current stock price). While we value them giving holding
company discount at Rs1349.5/share. Its VSF business is extremely profitable business
through cycles (average EBITDA margins in the last 12 years is at 31%) and generates strong
returns (55% ROCE). We maintain our Buy recommendation the stock despite the headwinds to its VSF business
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