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Grasim Industries (GRAS.BO)
Buy: Attractive Cement Valuations; VSF Steady
Maintain Buy — Grasim offers exposure to both cement and Viscose Staple
Fibre (VSF) and we feel it is the best way to gain exposure to the India cement
sector. There is value even after we apply a 10% holding company discount to
replacement cost to value its cement capacity of 51mtpa (Grasim holds 60% in
UltraTech Cement (UTCL) which in turn controls 3m tpa in ETA Star Cement). Its
VSF/chemical business (30-32% of cons. EBITDA) offers some downside
protection and should generate steady EBITDA of Rs18-20bn pa during FY12-14.
We feel there is an unjustified valuation dissonance – at a FY13 EV/t of US$82
vs. replacement cost of US$120 – we maintain Buy on Grasim.
Revising TP to Rs2,728 (from Rs3,010) — We value its 51mtpa cement
capacity using an EV/t of $120/t for Sep12 (vs. Mar12), in-line with replacement
costs, but apply a 10% holding company discount, to get a value of Rs1,623
(vsRs1,598) for Grasim’s 60% holding in UTCL. We value Grasim’s other
businesses (VSF/Chemicals) at an EV/EBITDA of 6x FY12E, at a premium to
hard commodity stocks which trade at ~5x (given steady profits), giving a value of
Rs1,105, (vs Rs1,411 due to lower VSF profits). Our TP implies a Sep12 adj
EV/EBITDA of 6.6x and P/E of 10.2x. Our PAT estimates rise 16/12% in
FY12/FY13 largely on the back of higher cement profits (UTCL) and despite
lower VSF profitability.
Cement: positive near term; but downside risk — UTCL plans two brownfield
capacities totaling 9.2mtpa (Chhattisgarh & Karnataka) at a total capex of
Rs51bn (~US$120/t) by FY14. Additional capex of Rs59bn ($1.2bn) will be spent
on logistics/power/modernisation/RMC. UTCL targets completion by FY14, but
we assume full completion only by FY15. While cement prices have recovered
lost ground recently and should remain firm in the near term, we believe there is
downside risk as there is surplus capacity and the market is still fragmented.
VSF outlook is steady — Current capacity is 334ktpa (~11% of world) and is
expected to be hiked by 156ktpa to 490ktpa by FY14. This includes 36ktpa of
brownfield capacity in Karnataka (Rs4.5bn) and 120ktpa of greenfield capacity (to
make specialty fibres) at Vilayat, Gujarat (Rs17bn). As VSF prices have come off
from high levels of Rs152/kg to Rs120-125/kg, margins would be lower, but still
likely to remain at ~30-32%. Grasim gains from its integrated capacity. Key risks
include prices of cotton/PSF; pulp/caustic soda prices; Chinese VSF output.
Downside risks — Lower cement/VSF prices/demand; capacity additions.
Grasim Industries
Company description
Grasim is a diversified company with two main businesses - cement and viscose
staple fibre (VSF). These two core businesses account for 96% of sales. It has
other minor divisions such as chemicals and textiles. Grasim holds 60% in
UltraTech Cement (UTCL), which has 49m tpa of capacity and is India’s largest
cement company. UTCL also controls ETA Star Cement which has 3m tpa of
capacity based in the UAE, Bahrain and Bangladesh, taking the group’s total
cement capacity to 52mtpa. VSF capacity is based within Grasim (capacity 334,000
tonnes) and accounts for 20% of sales. The non-cement businesses account for
~30% of Grasim’s consolidated EBITDA. UTCL plans to set up 9.2mtpa of cement
capacity by FY14 in order to maintain its market share. UTLC has a market share of
17% with well spread out markets. It sells 30% in north India, 29% in west, 20% in
south, 19% in the east and 2% in the export market. Grasim’s VSF capacity
accounts for 11% of the global market, and is expected to rise to 490k tpa by FY14.
Investment strategy
We rate Grasim as Buy/Low Risk (1L) with a target price of Rs2,728. Grasim offers
exposure to both cement and VSF. In our opinion it is the best way to gain exposure
to the India cement sector, and it offers value even after applying a 10% holding
company discount to replacement cost to value its cement capacity of 51mtpa
(Grasim holds 60% in UltraTech Cement (UTCL)). Its VSF/chemical business (30-
32% of cons. EBITDA) offers some downside protection and should generate
steady EBITDA of Rs18-20bn pa. We also view that Grasim is trading at an
unjustified valuation dissonance - a CY11E EV/t of US$82 vs. replacement cost of
US$120. UTCL has started work on 9.2mtpa of brownfield cement capacities
(4.8mtpa at Chhattisgarh & 4.4mtpa at Karnataka) at a total capex of Rs51bn
(~US$120/t), with completion expected by early-FY14. While prices have recovered
lost ground recently and should remain firm near term, we believe there is downside
risk as there is more than adequate supply and the market is still fragmented.
Valuation
We value Grasim using SOTP. We value its 51mtpa cement capacity using an
EV/tonne (a common metric used for cement companies) of US$120/t for Sep12, inline
with replacement costs, but apply a 10% holding company discount due to the
changed group structure, imputing a value of Rs1,623/share for Grasim's 60%
holding in UTCL. Grasim's other businesses (VSF/Chemicals) are valued at an
EV/EBITDA of 6x Sep12, at a premium to hard commodity businesses which are
trading at ~5x (given its steady margin generating capability), giving a value of
Rs1,105/share. Our Grasim target price of Rs2,728 implies Sep12 EV/EBITDA of
6.6x and P/E of 10.2x.
Risks
We rate Grasim Low Risk, in line with our quantitative risk-rating system, which
tracks 260-day historical share price volatility. Key downside risks to our target price
include: (1) Sharp downward rating for cement stocks due to falling cement
prices/demand; (2) A fall in prices of VSF and/or competing fibres which would
negatively impact margins; and 3) Changes in the duty/tax regime to the detriment
of producers.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Grasim Industries (GRAS.BO)
Buy: Attractive Cement Valuations; VSF Steady
Maintain Buy — Grasim offers exposure to both cement and Viscose Staple
Fibre (VSF) and we feel it is the best way to gain exposure to the India cement
sector. There is value even after we apply a 10% holding company discount to
replacement cost to value its cement capacity of 51mtpa (Grasim holds 60% in
UltraTech Cement (UTCL) which in turn controls 3m tpa in ETA Star Cement). Its
VSF/chemical business (30-32% of cons. EBITDA) offers some downside
protection and should generate steady EBITDA of Rs18-20bn pa during FY12-14.
We feel there is an unjustified valuation dissonance – at a FY13 EV/t of US$82
vs. replacement cost of US$120 – we maintain Buy on Grasim.
Revising TP to Rs2,728 (from Rs3,010) — We value its 51mtpa cement
capacity using an EV/t of $120/t for Sep12 (vs. Mar12), in-line with replacement
costs, but apply a 10% holding company discount, to get a value of Rs1,623
(vsRs1,598) for Grasim’s 60% holding in UTCL. We value Grasim’s other
businesses (VSF/Chemicals) at an EV/EBITDA of 6x FY12E, at a premium to
hard commodity stocks which trade at ~5x (given steady profits), giving a value of
Rs1,105, (vs Rs1,411 due to lower VSF profits). Our TP implies a Sep12 adj
EV/EBITDA of 6.6x and P/E of 10.2x. Our PAT estimates rise 16/12% in
FY12/FY13 largely on the back of higher cement profits (UTCL) and despite
lower VSF profitability.
Cement: positive near term; but downside risk — UTCL plans two brownfield
capacities totaling 9.2mtpa (Chhattisgarh & Karnataka) at a total capex of
Rs51bn (~US$120/t) by FY14. Additional capex of Rs59bn ($1.2bn) will be spent
on logistics/power/modernisation/RMC. UTCL targets completion by FY14, but
we assume full completion only by FY15. While cement prices have recovered
lost ground recently and should remain firm in the near term, we believe there is
downside risk as there is surplus capacity and the market is still fragmented.
VSF outlook is steady — Current capacity is 334ktpa (~11% of world) and is
expected to be hiked by 156ktpa to 490ktpa by FY14. This includes 36ktpa of
brownfield capacity in Karnataka (Rs4.5bn) and 120ktpa of greenfield capacity (to
make specialty fibres) at Vilayat, Gujarat (Rs17bn). As VSF prices have come off
from high levels of Rs152/kg to Rs120-125/kg, margins would be lower, but still
likely to remain at ~30-32%. Grasim gains from its integrated capacity. Key risks
include prices of cotton/PSF; pulp/caustic soda prices; Chinese VSF output.
Downside risks — Lower cement/VSF prices/demand; capacity additions.
Grasim Industries
Company description
Grasim is a diversified company with two main businesses - cement and viscose
staple fibre (VSF). These two core businesses account for 96% of sales. It has
other minor divisions such as chemicals and textiles. Grasim holds 60% in
UltraTech Cement (UTCL), which has 49m tpa of capacity and is India’s largest
cement company. UTCL also controls ETA Star Cement which has 3m tpa of
capacity based in the UAE, Bahrain and Bangladesh, taking the group’s total
cement capacity to 52mtpa. VSF capacity is based within Grasim (capacity 334,000
tonnes) and accounts for 20% of sales. The non-cement businesses account for
~30% of Grasim’s consolidated EBITDA. UTCL plans to set up 9.2mtpa of cement
capacity by FY14 in order to maintain its market share. UTLC has a market share of
17% with well spread out markets. It sells 30% in north India, 29% in west, 20% in
south, 19% in the east and 2% in the export market. Grasim’s VSF capacity
accounts for 11% of the global market, and is expected to rise to 490k tpa by FY14.
Investment strategy
We rate Grasim as Buy/Low Risk (1L) with a target price of Rs2,728. Grasim offers
exposure to both cement and VSF. In our opinion it is the best way to gain exposure
to the India cement sector, and it offers value even after applying a 10% holding
company discount to replacement cost to value its cement capacity of 51mtpa
(Grasim holds 60% in UltraTech Cement (UTCL)). Its VSF/chemical business (30-
32% of cons. EBITDA) offers some downside protection and should generate
steady EBITDA of Rs18-20bn pa. We also view that Grasim is trading at an
unjustified valuation dissonance - a CY11E EV/t of US$82 vs. replacement cost of
US$120. UTCL has started work on 9.2mtpa of brownfield cement capacities
(4.8mtpa at Chhattisgarh & 4.4mtpa at Karnataka) at a total capex of Rs51bn
(~US$120/t), with completion expected by early-FY14. While prices have recovered
lost ground recently and should remain firm near term, we believe there is downside
risk as there is more than adequate supply and the market is still fragmented.
Valuation
We value Grasim using SOTP. We value its 51mtpa cement capacity using an
EV/tonne (a common metric used for cement companies) of US$120/t for Sep12, inline
with replacement costs, but apply a 10% holding company discount due to the
changed group structure, imputing a value of Rs1,623/share for Grasim's 60%
holding in UTCL. Grasim's other businesses (VSF/Chemicals) are valued at an
EV/EBITDA of 6x Sep12, at a premium to hard commodity businesses which are
trading at ~5x (given its steady margin generating capability), giving a value of
Rs1,105/share. Our Grasim target price of Rs2,728 implies Sep12 EV/EBITDA of
6.6x and P/E of 10.2x.
Risks
We rate Grasim Low Risk, in line with our quantitative risk-rating system, which
tracks 260-day historical share price volatility. Key downside risks to our target price
include: (1) Sharp downward rating for cement stocks due to falling cement
prices/demand; (2) A fall in prices of VSF and/or competing fibres which would
negatively impact margins; and 3) Changes in the duty/tax regime to the detriment
of producers.
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