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UBS Investment Research
Grasim Industries
Q 2FY12 conference call- Key takeaways
VSF capacity utilization levels to remain high in H2 on improved demand
VSF volumes picked up in Q2, especially from September, driven by increased
demand/inventory re-stocking. Grasim expects VSF volumes to rise in H2 with
plants operating at full capacity (-1% y/y in H1, UBS-e +1% in FY12). Current
realizations are ~Rs130/kg and local prices are expected to remain steady. Margins
were impacted by increase in input costs, though pulp prices are softening. Grasim
is focusing on enhancing cost efficiencies.
Expects 7-8% growth in cement demand in H2, driven by rural demand
It expects ~17mt of capacity additions in the industry in FY12 (~6mt added in Q2).
Star Cement increased its market share to 14.9% from 12.8%, in spite of de-growth
in UAE. However, pricing is under pressure in its markets and hence it continued
to achieve break-even at the EBITDA level. Imported coal costs have softened by
US$2-3/t and current cost is ~US$138/t. The company thinks coal linkages will be
difficult to get for the expansion projects and it will increase the usage of pet coke.
Capacity expansion on track
Although only Rs15.5bn was spent in H1, the company is confident of achieving
its FY12 target of Rs64bn. Domjso capacity is being expanded from 210,000tons
to 255,000 tons and will be operational mid-next year. The performance of Domjso
was impacted by maintenance shut-down during the quarter, though operational
performance was in-line with expectations.
Valuation: Buy rating
Grasim is our preferred pick in the sector. Our price target is based on SOTP -12m price target Rs2,600.00
Key highlights from the conference call
VSF Prices: Prices recovered marginally in Q2 with some improvement in
sentiment. Local prices are expected to remain steady with average realization of
about Rs130/kg (import prices are higher than local prices).
Premium to Cotton prices: VSF sells at a premium to cotton (historical
average of 22% including wastage). But currently, spot cotton prices are 8-12%
higher than forward prices. So the historical trend implies that either cotton
prices will fall or VSF prices will increase. Cotton crop is expected to be good
this year, though the cost of growing cotton has also gone up.
VSF volumes: Demand has picked up due to improved consumption and
restoration of the depleted inventory (Q2 has witnessed renewed
interest/inventory build up amongst buyers after inventory destocking in Q1).
The company stated that markets may remain volatile in the near term (macro
environment uncertainty, especially in the Eurozone), though long term outlook
remains positive for VSF. VSF volumes are expected to rise in Q3 and Q4 with
plants running at full capacity (at the beginning of Q2 there was a weak tone to
the market; then there was a sharp pull-back in demand in September and
consequent increase in prices).
VSF EBITDA: VSF EBITDA/t was affected due to 21% increase in input costs
(pulp, caustic soda, sulphur and coal prices; it expects some softening of pulp
prices though caustic soda and sulphur continue to be high). The company is
focusing on increasing cost efficiencies.
VSF capacity expansion and utilization: Grasim expects capacity utilization to
remain robust in FY14 as about 75% of capacity would be focused towards
specialty products (Modal, Micro-modal and Diet-fibre). The company is a
market leader in diet fibre. Grasim expects domestic market to cater towards
35,000 tons capacity expansion at Harihar, while the rest 120,000 tons will have
a judicious blend of both domestic and export markets.
Pulp JV – Higher energy costs and scheduled maintenance shutdown at
Nackawic and Domsjo impacted performance during the quarter.
Domsjo: Operational performance is in-line with expectations, though it was
impacted by maintenance shutdown in summer (related maintenance costs were
Rs200-300m). It is expanding capacity from 210,000tons to 255,000tons which
will be operational by mid next year.
Cement Industry capacity additions: The company estimates about 17mt of
new capacity to be added in FY12 (about 6mt added in Q2).
Coal prices: Imported coal prices increased by about 25% y/y to US$138/t
(from US$110/t earlier). The domestic linkage price increase has been 30%
(since March this year). The company expects coal prices to stabilize at current
levels and has witnessed a softening of about US$2-3/t.
Coal usage: There is no change in the fuel mix from last quarter: Domestic coal
38% (linkage 32%+ e-auction 6%), imported Coal 38% and balance is pet coke.
The company shifted 10% of imported coal in the mix to pet coke in Q1 thereby
saving 17-18% due to the price difference. The company stated that chances of
getting linkage coal are difficult for the expansion projects and increasing usage
of pet-coke is likely. It is also progressing on its allotted coal block.
Star Cement: Sales volume of 0.65mt in Q2 versus 0.66mt in Q1 with
realization of US$53/t. UAE witnessed de-growth though Star’s market share
improved to 14.9% in Q2 from 12.8%. Pricing though is under pressure and
realizations were at US$53/t. The company continued to break-even at EBITDA
level in the quarter.
Capex: Total capex planned is Rs144bn with Rs34bn in the standalone entity
and Rs110bn earmarked for cement. Grasim has spent Rs15.5bn in H1.
Spending will increase significantly in Q3 and Q4 of this year as the company
foresees Rs64bn capex for FY12.
White cement: EBITDA margins in this business (including wall-care putty) are
at about 30%.
Chemical business: PBIT increased 44% y/y driven by higher volumes and
higher ECU realizations.
Grasim Industries
Grasim is the holding company (60.3% stake) of Ultratech, India's largest
cement company with a total capacity of about 52mt. It is also India's largest
manufacturer of viscose staple fibre (VSF) and has a 10% global market share. It
also has interests in chemicals and textiles.
Statement of Risk
We believe the key risk comes from a significant decline in cement prices,
delays in its capacity additions, rise in input costs (mainly coal/freight) and any
government intervention to lower cement prices. Grasim imports close to 33%
of its requirements so any significant increase in imported coal prices are likely
to be negative for the company. The proposed restructuring plan needs to be
approved by various regulatory authorities.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Grasim Industries
Q 2FY12 conference call- Key takeaways
VSF capacity utilization levels to remain high in H2 on improved demand
VSF volumes picked up in Q2, especially from September, driven by increased
demand/inventory re-stocking. Grasim expects VSF volumes to rise in H2 with
plants operating at full capacity (-1% y/y in H1, UBS-e +1% in FY12). Current
realizations are ~Rs130/kg and local prices are expected to remain steady. Margins
were impacted by increase in input costs, though pulp prices are softening. Grasim
is focusing on enhancing cost efficiencies.
Expects 7-8% growth in cement demand in H2, driven by rural demand
It expects ~17mt of capacity additions in the industry in FY12 (~6mt added in Q2).
Star Cement increased its market share to 14.9% from 12.8%, in spite of de-growth
in UAE. However, pricing is under pressure in its markets and hence it continued
to achieve break-even at the EBITDA level. Imported coal costs have softened by
US$2-3/t and current cost is ~US$138/t. The company thinks coal linkages will be
difficult to get for the expansion projects and it will increase the usage of pet coke.
Capacity expansion on track
Although only Rs15.5bn was spent in H1, the company is confident of achieving
its FY12 target of Rs64bn. Domjso capacity is being expanded from 210,000tons
to 255,000 tons and will be operational mid-next year. The performance of Domjso
was impacted by maintenance shut-down during the quarter, though operational
performance was in-line with expectations.
Valuation: Buy rating
Grasim is our preferred pick in the sector. Our price target is based on SOTP -12m price target Rs2,600.00
Key highlights from the conference call
VSF Prices: Prices recovered marginally in Q2 with some improvement in
sentiment. Local prices are expected to remain steady with average realization of
about Rs130/kg (import prices are higher than local prices).
Premium to Cotton prices: VSF sells at a premium to cotton (historical
average of 22% including wastage). But currently, spot cotton prices are 8-12%
higher than forward prices. So the historical trend implies that either cotton
prices will fall or VSF prices will increase. Cotton crop is expected to be good
this year, though the cost of growing cotton has also gone up.
VSF volumes: Demand has picked up due to improved consumption and
restoration of the depleted inventory (Q2 has witnessed renewed
interest/inventory build up amongst buyers after inventory destocking in Q1).
The company stated that markets may remain volatile in the near term (macro
environment uncertainty, especially in the Eurozone), though long term outlook
remains positive for VSF. VSF volumes are expected to rise in Q3 and Q4 with
plants running at full capacity (at the beginning of Q2 there was a weak tone to
the market; then there was a sharp pull-back in demand in September and
consequent increase in prices).
VSF EBITDA: VSF EBITDA/t was affected due to 21% increase in input costs
(pulp, caustic soda, sulphur and coal prices; it expects some softening of pulp
prices though caustic soda and sulphur continue to be high). The company is
focusing on increasing cost efficiencies.
VSF capacity expansion and utilization: Grasim expects capacity utilization to
remain robust in FY14 as about 75% of capacity would be focused towards
specialty products (Modal, Micro-modal and Diet-fibre). The company is a
market leader in diet fibre. Grasim expects domestic market to cater towards
35,000 tons capacity expansion at Harihar, while the rest 120,000 tons will have
a judicious blend of both domestic and export markets.
Pulp JV – Higher energy costs and scheduled maintenance shutdown at
Nackawic and Domsjo impacted performance during the quarter.
Domsjo: Operational performance is in-line with expectations, though it was
impacted by maintenance shutdown in summer (related maintenance costs were
Rs200-300m). It is expanding capacity from 210,000tons to 255,000tons which
will be operational by mid next year.
Cement Industry capacity additions: The company estimates about 17mt of
new capacity to be added in FY12 (about 6mt added in Q2).
Coal prices: Imported coal prices increased by about 25% y/y to US$138/t
(from US$110/t earlier). The domestic linkage price increase has been 30%
(since March this year). The company expects coal prices to stabilize at current
levels and has witnessed a softening of about US$2-3/t.
Coal usage: There is no change in the fuel mix from last quarter: Domestic coal
38% (linkage 32%+ e-auction 6%), imported Coal 38% and balance is pet coke.
The company shifted 10% of imported coal in the mix to pet coke in Q1 thereby
saving 17-18% due to the price difference. The company stated that chances of
getting linkage coal are difficult for the expansion projects and increasing usage
of pet-coke is likely. It is also progressing on its allotted coal block.
Star Cement: Sales volume of 0.65mt in Q2 versus 0.66mt in Q1 with
realization of US$53/t. UAE witnessed de-growth though Star’s market share
improved to 14.9% in Q2 from 12.8%. Pricing though is under pressure and
realizations were at US$53/t. The company continued to break-even at EBITDA
level in the quarter.
Capex: Total capex planned is Rs144bn with Rs34bn in the standalone entity
and Rs110bn earmarked for cement. Grasim has spent Rs15.5bn in H1.
Spending will increase significantly in Q3 and Q4 of this year as the company
foresees Rs64bn capex for FY12.
White cement: EBITDA margins in this business (including wall-care putty) are
at about 30%.
Chemical business: PBIT increased 44% y/y driven by higher volumes and
higher ECU realizations.
Grasim Industries
Grasim is the holding company (60.3% stake) of Ultratech, India's largest
cement company with a total capacity of about 52mt. It is also India's largest
manufacturer of viscose staple fibre (VSF) and has a 10% global market share. It
also has interests in chemicals and textiles.
Statement of Risk
We believe the key risk comes from a significant decline in cement prices,
delays in its capacity additions, rise in input costs (mainly coal/freight) and any
government intervention to lower cement prices. Grasim imports close to 33%
of its requirements so any significant increase in imported coal prices are likely
to be negative for the company. The proposed restructuring plan needs to be
approved by various regulatory authorities.
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