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Grasim Industries (GRAS.BO)
Buy Equity Research
Above expectations: VSF business surprises on volume and pricing
What surprised us
Grasim Industries reported 2QFY12 consolidated net income of Rs4.2bn
(+29% yoy, -44% qoq), 6% above GS estimates and 10% below Bloomberg
consensus. At the operating level, 2QFY12 consolidated EBITDA came
in at Rs10.3bn, 11% ahead of our and 14% ahead of consensus
estimates. The VSF business continued to report strong operating
performance - on higher volumes (due to strong restocking demand in
Sept, and early resumption of Nagda plant with onset of monsoon) and
higher pricing (realisations up 7% yoy). VSF margins came under pressure
due to rising input costs (EBITDA margins 28.2% vs. 31.8% in 2QFY11). The
company’s cement subsidiary Ultratech (Grasim owns 60% stake) saw
better-than-expected realizations (6% ahead of estimates), which was
somewhat off-set by rising variable costs (energy, staff, overhead). Of the
Rs64 bn capex outlay for the year, Rs15.4bn was spent in 1HFY12.
What to do with the stock
We fine-tune our FY12-14 EPS by 1% to 4% as a result of strong operating
numbers. At 4.5X FY12 EV/EBITDA, Grasim is trading at a 18% discount to
its mid-cycle of 5.5X. This would imply that either (1) the VSF business is
trading at a 70% discount to peers, despite better EBITDA margins and
returns; or (2) the implied holding company discount for the cement
business is a steep 40%, both of which appear unjustified. We reiterate our
Buy rating and fine-tune our 12-m SOTP based TP to Rs2,985 (from
Rs2,984) on revised estimates. Risks: Weakening VSF prices and margins
and muted volume growth in cement.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Grasim Industries (GRAS.BO)
Buy Equity Research
Above expectations: VSF business surprises on volume and pricing
What surprised us
Grasim Industries reported 2QFY12 consolidated net income of Rs4.2bn
(+29% yoy, -44% qoq), 6% above GS estimates and 10% below Bloomberg
consensus. At the operating level, 2QFY12 consolidated EBITDA came
in at Rs10.3bn, 11% ahead of our and 14% ahead of consensus
estimates. The VSF business continued to report strong operating
performance - on higher volumes (due to strong restocking demand in
Sept, and early resumption of Nagda plant with onset of monsoon) and
higher pricing (realisations up 7% yoy). VSF margins came under pressure
due to rising input costs (EBITDA margins 28.2% vs. 31.8% in 2QFY11). The
company’s cement subsidiary Ultratech (Grasim owns 60% stake) saw
better-than-expected realizations (6% ahead of estimates), which was
somewhat off-set by rising variable costs (energy, staff, overhead). Of the
Rs64 bn capex outlay for the year, Rs15.4bn was spent in 1HFY12.
What to do with the stock
We fine-tune our FY12-14 EPS by 1% to 4% as a result of strong operating
numbers. At 4.5X FY12 EV/EBITDA, Grasim is trading at a 18% discount to
its mid-cycle of 5.5X. This would imply that either (1) the VSF business is
trading at a 70% discount to peers, despite better EBITDA margins and
returns; or (2) the implied holding company discount for the cement
business is a steep 40%, both of which appear unjustified. We reiterate our
Buy rating and fine-tune our 12-m SOTP based TP to Rs2,985 (from
Rs2,984) on revised estimates. Risks: Weakening VSF prices and margins
and muted volume growth in cement.
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