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Grasim Industries — VSF disappoints; weakness
to stay
Country Overview
VSF business disappoints due to demand weakness
Grasim’s consolidated profit for 1Q FY12 totaled ~Rs7.5bn, up 31% YoY and
down 14% QoQ. Headline profit was in line with our expectations as weaker than
expected VSF profit was offset by positive surprise in the cement business. In the
VSF business, 1Q volumes fell 19% YoY likely due to lower demand for restocking
in the face of falling VSF prices.
VSF prices down as expected; near-term recovery unlikely
Currently, VSF prices are down ~20% from their peak in Apr ’11 and down ~16-
18% vs 1Q FY12 levels. This is in line with our expectations given sharp decline
in cotton prices and falling international VSF prices. At current levels, VSF prices
are at ~35-40% premium versus cotton and ~3-6% premium versus international
VSF prices. We think any VSF price recovery is unlikely at least for next 2 qtrs.
Outlook for cement also remains challenging
Profit outlook for Grasim’s cement subsidiary – UltraTech – appears challenging
given weak demand and steep overcapacity in the industry. On its earnings call,
Grasim & UltraTech mgt. said cement prices have fallen ~Rs8-10/bag vs
1QFY12. Our FY12-13 EBITDA forecasts for UltraTech reflect sharply lower
profits vs 1Q.
Cheap valuations key support for Neutral; PO trimmed
We have trimmed our PO for Grasim to Rs2360/sh (-6% vs earlier) on roll-forward
of the sum-of-parts valuation to FY13. Lower stock valuation mostly reflects YoY
drop in FY13-VSF earnings. Despite weak outlook for both VSF and cement
businesses, we retain our Neutral rating as the stock appears cheap and implied
value of its cement business is at 50% discount to UltraTech’s current share price
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Grasim Industries — VSF disappoints; weakness
to stay
Country Overview
VSF business disappoints due to demand weakness
Grasim’s consolidated profit for 1Q FY12 totaled ~Rs7.5bn, up 31% YoY and
down 14% QoQ. Headline profit was in line with our expectations as weaker than
expected VSF profit was offset by positive surprise in the cement business. In the
VSF business, 1Q volumes fell 19% YoY likely due to lower demand for restocking
in the face of falling VSF prices.
VSF prices down as expected; near-term recovery unlikely
Currently, VSF prices are down ~20% from their peak in Apr ’11 and down ~16-
18% vs 1Q FY12 levels. This is in line with our expectations given sharp decline
in cotton prices and falling international VSF prices. At current levels, VSF prices
are at ~35-40% premium versus cotton and ~3-6% premium versus international
VSF prices. We think any VSF price recovery is unlikely at least for next 2 qtrs.
Outlook for cement also remains challenging
Profit outlook for Grasim’s cement subsidiary – UltraTech – appears challenging
given weak demand and steep overcapacity in the industry. On its earnings call,
Grasim & UltraTech mgt. said cement prices have fallen ~Rs8-10/bag vs
1QFY12. Our FY12-13 EBITDA forecasts for UltraTech reflect sharply lower
profits vs 1Q.
Cheap valuations key support for Neutral; PO trimmed
We have trimmed our PO for Grasim to Rs2360/sh (-6% vs earlier) on roll-forward
of the sum-of-parts valuation to FY13. Lower stock valuation mostly reflects YoY
drop in FY13-VSF earnings. Despite weak outlook for both VSF and cement
businesses, we retain our Neutral rating as the stock appears cheap and implied
value of its cement business is at 50% discount to UltraTech’s current share price
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