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Grasim Industries (GRASIM)
Cement
Cement outperforms, VSF not far behind. Grasim Industries reported another
quarter of stellar earnings led by strong sequential growth in profitability of its cement
subsidiary Ultratech, and supported by improving realizations in the VSF business
(despite production hiccups during the quarter). We reiterate our BUY rating,
Results beat estimates driven by strong cement performance
Grasim reported revenue of Rs58.7 bn (-8% qoq, 16% yoy), operating profit of Rs15.7 bn (2%
qoq, 21% yoy) and net income of Rs7.5 bn (31% yoy) against our estimate of Rs57 bn, Rs13 bn
and Rs5.6 bn respectively. Strong operational performance in the cement subsidiary was driven by
(1) higher-than-estimated realizations and (2) lower-than-estimated cost inflation leading to an
EBITDA beat of 21% at Ultratech. A sharp 36% sequential decline in VSF volumes was partially
offset by improved realizations and lower overhead expenses yielding an in-line operational
performance at standalone level. We discuss performance of each segment in subsequent sections.
VSF volumes weak, though realizations compensate
Grasim’s VSF division registered a sharp 36% sequential decline in volumes primarily due to a
temporary shutdown of Nagda plant on account of water shortages during the end of the quarter.
However, VSF realizations improved 5% qoq as domestic VSF prices holding up despite the sharp
correction in cotton prices. Management has highlighted a weakening demand and pricing trend
and we accordingly factor a 5% yoy decline in VSF realizations in FY2012E.
Cement realizations improve sequentially, cost inflation persists
Grasim’s cement division’s (UltraTech Cement) average realization increased 7% qoq benefitting
from high prices that prevailed through better part of the quarter with softening of prices
commencing only in the month of June. However, cost inflation, driven primarily by increasing fuel
cost continued with power and fuel cost increasing to Rs1,062/ton in 1QFY12 from Rs902/ton in
4QFY11
Maintain BUY with a target price of Rs2,900/share
We maintain our BUY rating with a revised target price of Rs2,900/share. On comparative
valuations on FY2013E, our assigned valuation implies 4.5X EV/EBITDA for the VSF business. We
value Grasim’s 60% stake in UTCEM at our target price of UTCEM (Rs1,220/share) and factor a
holding company discount of 20%. We value the steady cash streams from VSF and allied
chemicals business using DCF model.
We have revised our EPS estimate to Rs260/share (previously Rs264/share) in FY2012Eand to
Rs289/share (previously Rs295/share) in FY2013E as we adjust for lower volumes in both cement
and VSF business.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Grasim Industries (GRASIM)
Cement
Cement outperforms, VSF not far behind. Grasim Industries reported another
quarter of stellar earnings led by strong sequential growth in profitability of its cement
subsidiary Ultratech, and supported by improving realizations in the VSF business
(despite production hiccups during the quarter). We reiterate our BUY rating,
Results beat estimates driven by strong cement performance
Grasim reported revenue of Rs58.7 bn (-8% qoq, 16% yoy), operating profit of Rs15.7 bn (2%
qoq, 21% yoy) and net income of Rs7.5 bn (31% yoy) against our estimate of Rs57 bn, Rs13 bn
and Rs5.6 bn respectively. Strong operational performance in the cement subsidiary was driven by
(1) higher-than-estimated realizations and (2) lower-than-estimated cost inflation leading to an
EBITDA beat of 21% at Ultratech. A sharp 36% sequential decline in VSF volumes was partially
offset by improved realizations and lower overhead expenses yielding an in-line operational
performance at standalone level. We discuss performance of each segment in subsequent sections.
VSF volumes weak, though realizations compensate
Grasim’s VSF division registered a sharp 36% sequential decline in volumes primarily due to a
temporary shutdown of Nagda plant on account of water shortages during the end of the quarter.
However, VSF realizations improved 5% qoq as domestic VSF prices holding up despite the sharp
correction in cotton prices. Management has highlighted a weakening demand and pricing trend
and we accordingly factor a 5% yoy decline in VSF realizations in FY2012E.
Cement realizations improve sequentially, cost inflation persists
Grasim’s cement division’s (UltraTech Cement) average realization increased 7% qoq benefitting
from high prices that prevailed through better part of the quarter with softening of prices
commencing only in the month of June. However, cost inflation, driven primarily by increasing fuel
cost continued with power and fuel cost increasing to Rs1,062/ton in 1QFY12 from Rs902/ton in
4QFY11
Maintain BUY with a target price of Rs2,900/share
We maintain our BUY rating with a revised target price of Rs2,900/share. On comparative
valuations on FY2013E, our assigned valuation implies 4.5X EV/EBITDA for the VSF business. We
value Grasim’s 60% stake in UTCEM at our target price of UTCEM (Rs1,220/share) and factor a
holding company discount of 20%. We value the steady cash streams from VSF and allied
chemicals business using DCF model.
We have revised our EPS estimate to Rs260/share (previously Rs264/share) in FY2012Eand to
Rs289/share (previously Rs295/share) in FY2013E as we adjust for lower volumes in both cement
and VSF business.
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