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Grasim Industries
Solid numbers but some worries
Event
ƒ Results well above estimates: Grasim reported 1Q12 earnings above our
estimates, largely driven by good results in cement and in line results in the
VSF business. However, there has been some pressure on VSF prices due to
falling cotton prices, which was also reflected in low sales volume for the
quarter. We are reducing our VSF realisation estimate and EPS for FY12
marginally and reduce our target price slightly to Rs2,506/sh from Rs2,528/sh.
Maintain Outperform
Impact
ƒ Strong 1Q consolidated results: Net Sales at Rs58.72bn grew 16% YoY,
supported by an increase in both the VSF and cement divisions. EBITDA at
Rs15.8bn was up 21% YoY as cement business profitability increased by
Rs2.2bn and standalone increased by Rs517m. Net profit at Rs7.2bn,
recovered from Rs5.7bn reported last year.
ƒ VSF business – realisations offset volume decline: VSF business reported
EBITDA at Rs3.5bn, up 15% YoY. However, this was led by a sharp increase
in realisations, which have seen an increase of 29% in the past one year. As
cotton prices corrected sharply, VSF prices have also corrected which is
evident in lower sales volume, down 19% YoY. We have cut our price
estimate for VSF to Rs140/kg from Rs144/kg and expect a recovery in 2H.
ƒ Cement – good profits but could be the peak: Cement business earnings
did see an increase during the quarter despite low sales volume and muted
recovery in realisations mostly due to cost control. EBITDA margin in 1Q
came in at Rs1,200/t, against Rs985/t in 4Q. However, most of this is
temporary relief and 2Q will likely see increases again on account of the
recent hike in diesel prices as well as annual maintenance expenses. Also,
cement prices have started to correct and demand remains weak.
ƒ Focus on growth remains: Grasim is expanding its annual cement capacity
by 9.2mt (20%), which is expected to be online by 1Q FY14. However, it has
only spent 11.5% of the total capex earmarked for this expansion for FY12 in
1Q. For VSF, where capacity is being increased by 46%, it has only spent
11.7% of total capex required in FY12. This capacity is expected to be online
by end of FY13.
Earnings and target price revision
ƒ We have reduced our FY12/13/14 estimates by 4%/1%/1% respectively.
Target price lowered to Rs2,506/sh from Rs2,528/sh.
Price catalyst
ƒ 12-month price target: Rs2,506.00 based on a DCF methodology.
ƒ Catalyst: Rally in VSF prices, recovery in cement prices.
Action and recommendation
ƒ Maintain Outperform: Grasim appears to be the only hedged play among the
large cement companies. We hope that profitability will bottom out in 2Q for
both cement and VSF and provide a good entry point.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Grasim Industries
Solid numbers but some worries
Event
ƒ Results well above estimates: Grasim reported 1Q12 earnings above our
estimates, largely driven by good results in cement and in line results in the
VSF business. However, there has been some pressure on VSF prices due to
falling cotton prices, which was also reflected in low sales volume for the
quarter. We are reducing our VSF realisation estimate and EPS for FY12
marginally and reduce our target price slightly to Rs2,506/sh from Rs2,528/sh.
Maintain Outperform
Impact
ƒ Strong 1Q consolidated results: Net Sales at Rs58.72bn grew 16% YoY,
supported by an increase in both the VSF and cement divisions. EBITDA at
Rs15.8bn was up 21% YoY as cement business profitability increased by
Rs2.2bn and standalone increased by Rs517m. Net profit at Rs7.2bn,
recovered from Rs5.7bn reported last year.
ƒ VSF business – realisations offset volume decline: VSF business reported
EBITDA at Rs3.5bn, up 15% YoY. However, this was led by a sharp increase
in realisations, which have seen an increase of 29% in the past one year. As
cotton prices corrected sharply, VSF prices have also corrected which is
evident in lower sales volume, down 19% YoY. We have cut our price
estimate for VSF to Rs140/kg from Rs144/kg and expect a recovery in 2H.
ƒ Cement – good profits but could be the peak: Cement business earnings
did see an increase during the quarter despite low sales volume and muted
recovery in realisations mostly due to cost control. EBITDA margin in 1Q
came in at Rs1,200/t, against Rs985/t in 4Q. However, most of this is
temporary relief and 2Q will likely see increases again on account of the
recent hike in diesel prices as well as annual maintenance expenses. Also,
cement prices have started to correct and demand remains weak.
ƒ Focus on growth remains: Grasim is expanding its annual cement capacity
by 9.2mt (20%), which is expected to be online by 1Q FY14. However, it has
only spent 11.5% of the total capex earmarked for this expansion for FY12 in
1Q. For VSF, where capacity is being increased by 46%, it has only spent
11.7% of total capex required in FY12. This capacity is expected to be online
by end of FY13.
Earnings and target price revision
ƒ We have reduced our FY12/13/14 estimates by 4%/1%/1% respectively.
Target price lowered to Rs2,506/sh from Rs2,528/sh.
Price catalyst
ƒ 12-month price target: Rs2,506.00 based on a DCF methodology.
ƒ Catalyst: Rally in VSF prices, recovery in cement prices.
Action and recommendation
ƒ Maintain Outperform: Grasim appears to be the only hedged play among the
large cement companies. We hope that profitability will bottom out in 2Q for
both cement and VSF and provide a good entry point.
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