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We recommend ADD on Grasim, primarily due to likely
improvement in its 60% cement subsidiary, UltraTech
Cement. Thus, we expect Grasim’s consolidated earnings to
improve in FY14. VSF prices could decline in the near term,
owing to increased cotton supply in the current season, as
estimated by the International Cotton Advisory Committee
(ICAC). This would affect earnings and volume growth in the
VSF division in FY12 and FY13. Grasim is trading at a
reasonable 9.5x FY13ii P/E after the recent correction in its
share price.
VSF prices declined sharply over the past three months:
Cotton prices declined 40% (from early April until end-July) in the
domestic market on possibility of bumper cotton production in the
current year. Thus, VSF prices in the international and domestic
markets declined 34% and 23%, respectively, in the past three
months (VSF is a competing product to cotton). Cotton production is
likely to rise sharply in FY12, as farmers have increased cotton
acreage in response to high cotton prices on YoY basis. ICAC expects
global cotton production to rise 8% in the 2011/12 season and
stocks-to-use ratio to recover globally from 37% in 2010/11 to 43%
in 2011/12.
Concerns on the VSF segment largely priced in: We expect
Grasim’s VSF volume to decline in FY12 on likely decline in demand
due to de-stocking in the value chain (sales volume declined 19%
YoY in 1QFY12). VSF prices may decline further, in our view, in the
event of bumper cotton production as projected by ICAC. However,
Grasim’s share price declined ~20% in the past four months, which
we believe, largely reflects the risk of bumper cotton production.
Visibility on cotton production is likely by end-October, when
harvesting peaks in the two major cotton-producing countries (China
and India).
Cement subsidiary turnaround to boost profitability in FY14:
We expect Grasim’s FY12 and FY13 earnings to be under pressure,
owing to depressed VSF markets and near-term difficulties in the
cement subsidiary. We expect performance of the cement subsidiary
to improve from 2HFY13, which is likely to boost consolidated
profitability in FY14.
Stock reasonably valued post correction, ADD: We introduce
FY14 estimates for Grasim; we expect headwinds in the VSF
business and the cement subsidiary in the near term. We expect
improved pricing power for the cement subsidiary from 2HFY13 as
utilisation in the cement industry is likely to improve with slowdown
in capacity expansion. The stock declined 20% from its peak in the
past four months, and we believe it prices in near-term headwinds
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
We recommend ADD on Grasim, primarily due to likely
improvement in its 60% cement subsidiary, UltraTech
Cement. Thus, we expect Grasim’s consolidated earnings to
improve in FY14. VSF prices could decline in the near term,
owing to increased cotton supply in the current season, as
estimated by the International Cotton Advisory Committee
(ICAC). This would affect earnings and volume growth in the
VSF division in FY12 and FY13. Grasim is trading at a
reasonable 9.5x FY13ii P/E after the recent correction in its
share price.
VSF prices declined sharply over the past three months:
Cotton prices declined 40% (from early April until end-July) in the
domestic market on possibility of bumper cotton production in the
current year. Thus, VSF prices in the international and domestic
markets declined 34% and 23%, respectively, in the past three
months (VSF is a competing product to cotton). Cotton production is
likely to rise sharply in FY12, as farmers have increased cotton
acreage in response to high cotton prices on YoY basis. ICAC expects
global cotton production to rise 8% in the 2011/12 season and
stocks-to-use ratio to recover globally from 37% in 2010/11 to 43%
in 2011/12.
Concerns on the VSF segment largely priced in: We expect
Grasim’s VSF volume to decline in FY12 on likely decline in demand
due to de-stocking in the value chain (sales volume declined 19%
YoY in 1QFY12). VSF prices may decline further, in our view, in the
event of bumper cotton production as projected by ICAC. However,
Grasim’s share price declined ~20% in the past four months, which
we believe, largely reflects the risk of bumper cotton production.
Visibility on cotton production is likely by end-October, when
harvesting peaks in the two major cotton-producing countries (China
and India).
Cement subsidiary turnaround to boost profitability in FY14:
We expect Grasim’s FY12 and FY13 earnings to be under pressure,
owing to depressed VSF markets and near-term difficulties in the
cement subsidiary. We expect performance of the cement subsidiary
to improve from 2HFY13, which is likely to boost consolidated
profitability in FY14.
Stock reasonably valued post correction, ADD: We introduce
FY14 estimates for Grasim; we expect headwinds in the VSF
business and the cement subsidiary in the near term. We expect
improved pricing power for the cement subsidiary from 2HFY13 as
utilisation in the cement industry is likely to improve with slowdown
in capacity expansion. The stock declined 20% from its peak in the
past four months, and we believe it prices in near-term headwinds
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