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Recovery in VSF sales volumes and stabilisation in VSF prices were the key highlights of 2Q12.
EBITDA in VSF business was ahead by 28%. At its current valuation of 4.9x EV/EBITDA, the
stock offers best risk reward. Maintain Buy.
Strong VSF performance led to greater than expected EBITDA growth
Consolidated net sales grew 27% yoy to Rs56.5bn in 2Q12, mainly due to strong growth in
the VSF and Cement businesses. Standalone net sales also grew at a robust 29% yoy to
Rs12bn in 2Q12 led by 27% growth in VSF and 60% growth in the Chemical business.
Consolidated EBITDA at Rs9bn (5.5% ahead of our expectation of Rs8.5bn) in 2Q12 grew
25% yoy. EBITDA margin contracted substantially 1085bps qoq to 16% in 2Q12 from 27% in
1Q12, primarily affected by 756bps qoq rise in raw material cost to sales (25.7% in 2Q12) and
236bps rise in other expenses to sales (16.5% in 2Q12).
On a standalone basis, EBITDA grew 10.1% yoy to Rs2.9bn in 2Q12 (8.9% ahead of our
expectation of Rs2.7bn). Raw material cost inflation led to contraction in EBITDA margin of
1035bps qoq to 24.1% in 2Q12 from 34.5% in 1Q12. Raw material costs to sales increased
479bps yoy and 982bps qoq to 46.4% in 2Q12.
VSF and Cement margins affected by inflationary cost pressure
Cement sales grew 28% yoy to Rs42.1bn, led by higher realisations. Ultra Tech's average
cements realisation improved by 24% on a yoy basis, but fell 5% qoq to Rs4,272/t in 2Q12,
reflecting pricing pressure which was largely driven by seasonal factors (monsoons).
Standalone VSF business grew 27% yoy to Rs10.8bn in 2Q12, driven by 17% volume growth.
VSF sales volume grew 17% yoy to 78,959mt in 2Q12 (from 67,488mt in 2Q11). VSF
realisations for 2Q12 were Rs124,689/t, posting a growth of 7% yoy from Rs116,465/t in
2Q11. However, sequentially, realisations fell 18% from Rs152,409/t in 1Q12.
VSF EBITDA margin came in at 28.5%, contracted 334bps yoy (31.8% in 2Q11) and 1034bps
qoq (38.8% in 1Q12), impacted primarily by higher input costs. Input cost for VSF increased
21% yoy due to the rise in prices of pulp, caustic soda, sulphur and coal.
VSF volume growth in 2Q12 was led by a pickup in demand due to depleted inventory in the
value chain. The company expects the demand conditions for VSF to remain volatile due to
macro economic conditions and euro zone uncertainties.
Standalone chemical sales grew 60% to Rs1.9bn in 2Q12 led by good demand from end-user
industries. Chemical EBITDA margin at 24% for 2Q12 improved 160bps sequentially.
Capex plan on track
Cement brownfield expansion at Chhattisgarh (4.8mmt) and Karnataka (4.4mmt) would lead
total capacity to 62mmt by 1Q14. VSF expansion in Vilayat, Gujarat (120,000tpa) and
Harihar, Karnataka (36,500tpa) are on track with commissioning expected in FY13. Caustic
soda capacity expansion at Vilayat (182,500tpa) is progressing well with expected
commissioning in 4Q13.
Grasim spent a total of Rs15bn in 1H12 (Rs7.5bn in 2Q12, with Rs5.4bn spent on cement
expansion), towards the capex outlay for FY12 of Rs63.9bn. The company has allocated
Rs110bn towards cement capex and Rs34bn towards expansion of VSF business in the next
two years.
Near term margin pressure; Maintain Buy
We expect volatility in cement margins to persist for the next 4-6 quarters due to surplus
conditions. Despite operating at 70-72%, the Indian cement industry has been able to sustain
largely healthy margins in 1HFY2012. Costs have been rising, but the industry has been able
to raise prices by around 20% in 1HFY12 on a yoy basis.
Grasim has taken an effective increase of Rs5/Kg for VSF after registering an average
realisation of Rs125 for 2Q12. We expect this will help to pass the increased cost. Demand
conditions to remain volatile with pressure from input costs. We expect margin pressures in
the near term.
However, its valuation at 4.9x EV/EBITDA for FY12F offers the best risk reward. Beyond the
cyclical pressures, both its business are preparing for major volume lead growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Recovery in VSF sales volumes and stabilisation in VSF prices were the key highlights of 2Q12.
EBITDA in VSF business was ahead by 28%. At its current valuation of 4.9x EV/EBITDA, the
stock offers best risk reward. Maintain Buy.
Strong VSF performance led to greater than expected EBITDA growth
Consolidated net sales grew 27% yoy to Rs56.5bn in 2Q12, mainly due to strong growth in
the VSF and Cement businesses. Standalone net sales also grew at a robust 29% yoy to
Rs12bn in 2Q12 led by 27% growth in VSF and 60% growth in the Chemical business.
Consolidated EBITDA at Rs9bn (5.5% ahead of our expectation of Rs8.5bn) in 2Q12 grew
25% yoy. EBITDA margin contracted substantially 1085bps qoq to 16% in 2Q12 from 27% in
1Q12, primarily affected by 756bps qoq rise in raw material cost to sales (25.7% in 2Q12) and
236bps rise in other expenses to sales (16.5% in 2Q12).
On a standalone basis, EBITDA grew 10.1% yoy to Rs2.9bn in 2Q12 (8.9% ahead of our
expectation of Rs2.7bn). Raw material cost inflation led to contraction in EBITDA margin of
1035bps qoq to 24.1% in 2Q12 from 34.5% in 1Q12. Raw material costs to sales increased
479bps yoy and 982bps qoq to 46.4% in 2Q12.
VSF and Cement margins affected by inflationary cost pressure
Cement sales grew 28% yoy to Rs42.1bn, led by higher realisations. Ultra Tech's average
cements realisation improved by 24% on a yoy basis, but fell 5% qoq to Rs4,272/t in 2Q12,
reflecting pricing pressure which was largely driven by seasonal factors (monsoons).
Standalone VSF business grew 27% yoy to Rs10.8bn in 2Q12, driven by 17% volume growth.
VSF sales volume grew 17% yoy to 78,959mt in 2Q12 (from 67,488mt in 2Q11). VSF
realisations for 2Q12 were Rs124,689/t, posting a growth of 7% yoy from Rs116,465/t in
2Q11. However, sequentially, realisations fell 18% from Rs152,409/t in 1Q12.
VSF EBITDA margin came in at 28.5%, contracted 334bps yoy (31.8% in 2Q11) and 1034bps
qoq (38.8% in 1Q12), impacted primarily by higher input costs. Input cost for VSF increased
21% yoy due to the rise in prices of pulp, caustic soda, sulphur and coal.
VSF volume growth in 2Q12 was led by a pickup in demand due to depleted inventory in the
value chain. The company expects the demand conditions for VSF to remain volatile due to
macro economic conditions and euro zone uncertainties.
Standalone chemical sales grew 60% to Rs1.9bn in 2Q12 led by good demand from end-user
industries. Chemical EBITDA margin at 24% for 2Q12 improved 160bps sequentially.
Capex plan on track
Cement brownfield expansion at Chhattisgarh (4.8mmt) and Karnataka (4.4mmt) would lead
total capacity to 62mmt by 1Q14. VSF expansion in Vilayat, Gujarat (120,000tpa) and
Harihar, Karnataka (36,500tpa) are on track with commissioning expected in FY13. Caustic
soda capacity expansion at Vilayat (182,500tpa) is progressing well with expected
commissioning in 4Q13.
Grasim spent a total of Rs15bn in 1H12 (Rs7.5bn in 2Q12, with Rs5.4bn spent on cement
expansion), towards the capex outlay for FY12 of Rs63.9bn. The company has allocated
Rs110bn towards cement capex and Rs34bn towards expansion of VSF business in the next
two years.
Near term margin pressure; Maintain Buy
We expect volatility in cement margins to persist for the next 4-6 quarters due to surplus
conditions. Despite operating at 70-72%, the Indian cement industry has been able to sustain
largely healthy margins in 1HFY2012. Costs have been rising, but the industry has been able
to raise prices by around 20% in 1HFY12 on a yoy basis.
Grasim has taken an effective increase of Rs5/Kg for VSF after registering an average
realisation of Rs125 for 2Q12. We expect this will help to pass the increased cost. Demand
conditions to remain volatile with pressure from input costs. We expect margin pressures in
the near term.
However, its valuation at 4.9x EV/EBITDA for FY12F offers the best risk reward. Beyond the
cyclical pressures, both its business are preparing for major volume lead growth.
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