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GRASIM INDUSTRIES
PRICE: RS.2347 RECOMMENDATION: BUY
TARGET PRICE: RS.2665 FY13E P/E: 9.1X
q We recently met the management of Grasim industries to get an idea
about the demand and pricing scenario in cement and VSF.
q Cement pricing continues to remain strong in comparison with last year,
though prices have come off a bit in last one month.
q VSF prices have stabilized at the current levels. Rupee depreciation
would also balance out some fall in the VSF prices.
q Cost pressures have come off in coal costs as well as pulp prices but corresponding
currency depreciation may net off the benefits of cost decline.
q We tweak our estimates going forward to factor in slightly lower VSF
volumes, higher sulphur and caustic prices along with rupee depreciation.
At current price of Rs 2347, stock is trading at 9.6x and 9.1x P/E and
3.9x and 3.6x EV/EBITDA on FY12 and FY13 estimates respectively. We
continue to maintain BUY recommendation on the stock with a revised
price target of Rs 2665. (Rs 2763 earlier) on FY13 estimates.
Key highlights about the meeting
Cement prices rebounded back during Q3FY12; though demand is
still lower than expectations
Cement prices started witnessing improvement by end of Q2FY12 and reached highs
during November but failed to sustain these levels in December due to lack of demand.
Prices remained stable or improved in key western region like Mumbai or
Ahmedabad while declined in northern and eastern region. Southern region continues
to witness stable pricing due to supply discipline. However, demand continues to
grow at a sluggish pace due to lack of infrastructure awards as well as slowdown in
the real estate activity. We expect demand growth to remain sluggish during FY12
and is expected to improve from FY13 onwards.
We expect company to benefit from improvement in the cement prices seen during
Q3FY12. Grasim expects to spend nearly Rs 47 bn in FY12 and Rs 63bn in FY13 for
cement division expansion as well as modernization. It plans to set up additional
clinker units at Chattisgarh and Karnataka and bulk packaging terminals across various
states and upgrade and modernize existing units. We, however, expect a capital
outlay of Rs 35bn and Rs 50 bn in our estimates to take into account capex done till
H1FY12.
VSF prices stabilized
Average VSF prices were nearly Rs 152/kg in Q1FY12 and witnessed a decline to Rs
125/kg in Q2FY12. Decline in VSF prices was led by fall in the cotton prices but
prices have now stabilized at Rs 125-130/kg. Going forward, cotton production during
this year and global macro-economic conditions will also be a key deciding factor
about pricing going ahead. Out of the total production, nearly 80% is sold domestically
while 20% is exported. However, domestic sales are also indirectly dependent
upon global markets.
Company's capex for expanding the VSF capacity is going as per schedule and it
includes setting up of a Greenfield plant of 1,20,000 tons at Vilayat at a total cost of
Rs 17bn and brownfield expansion of 36500 tons at Harihar plant and plant
upgradation at a total cost of Rs 4.5bn.
Cost pressures easing out but rupee depreciation may play spoilsport
Cost pressures were witnessed by the company in past couple of quarters primarily
led by higher coal as well as pulp prices. During Q2FY12, company had to source
coal from open market due to strike at Singareni collieries. Out of the total coal
requirement, company sources 35-40% from linkage coal while remaining is from
open markets and imports. Imported coal prices have witnessed a correction during
Q3FY12, however corresponding rupee depreciation till now is larger than the fall in
import prices.
Pulp prices have also witnessed a decline during Q3FY12. Company imports 45-50%
of its pulp requirement and imported average pulp prices have witnessed a correction
of 9% during Q3FY12 till date in comparison with Q2FY12 average pulp prices.
However, due to rupee depreciation, we don't expect the impact of fall in pulp
prices to come through fully. Average sulphur prices in Q3FY12 till date are higher
than Q2FY12 and this coupled with rupee depreciation will have some negative impact
on overall costs.
Financial outlook
n We tweak our estimates to factor in lower VSF volumes for the company due to
global macro uncertainty which can impact company's VSF offtake. We thus
expect revenues to grow at a CAGR of 10.3% between FY11-FY13.
n We expect margins to improve in the cement division due to recent price hikes
while for VSF, margins may remain at similar levels on a sequential basis. We
thus expect margins to be 20.9% and 21.4% for FY12 and FY13 respectively.
n Net profit growth is expected to be impacted by higher depreciation going forward.
We expect net profits of Rs 22.5 bn and Rs 23.6bn for FY12 and FY13 respectively.
Valuation and recommendation
n At current market price of Rs 2347, stock is trading at 9.1x P/E and 3.6x EV/
EBITDA for FY13 respectively.
n We remain positive on the company since we expect company to benefit from
improvement in cement volumes as well as stable pricing in cement. Rupee depreciation
may also offset decline in the VSF prices.
n We tweak our estimates slightly and continue to maintain BUY with a revised
price target of Rs 2665 on FY13 estimates.(Rs 2763 earlier)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GRASIM INDUSTRIES
PRICE: RS.2347 RECOMMENDATION: BUY
TARGET PRICE: RS.2665 FY13E P/E: 9.1X
q We recently met the management of Grasim industries to get an idea
about the demand and pricing scenario in cement and VSF.
q Cement pricing continues to remain strong in comparison with last year,
though prices have come off a bit in last one month.
q VSF prices have stabilized at the current levels. Rupee depreciation
would also balance out some fall in the VSF prices.
q Cost pressures have come off in coal costs as well as pulp prices but corresponding
currency depreciation may net off the benefits of cost decline.
q We tweak our estimates going forward to factor in slightly lower VSF
volumes, higher sulphur and caustic prices along with rupee depreciation.
At current price of Rs 2347, stock is trading at 9.6x and 9.1x P/E and
3.9x and 3.6x EV/EBITDA on FY12 and FY13 estimates respectively. We
continue to maintain BUY recommendation on the stock with a revised
price target of Rs 2665. (Rs 2763 earlier) on FY13 estimates.
Key highlights about the meeting
Cement prices rebounded back during Q3FY12; though demand is
still lower than expectations
Cement prices started witnessing improvement by end of Q2FY12 and reached highs
during November but failed to sustain these levels in December due to lack of demand.
Prices remained stable or improved in key western region like Mumbai or
Ahmedabad while declined in northern and eastern region. Southern region continues
to witness stable pricing due to supply discipline. However, demand continues to
grow at a sluggish pace due to lack of infrastructure awards as well as slowdown in
the real estate activity. We expect demand growth to remain sluggish during FY12
and is expected to improve from FY13 onwards.
We expect company to benefit from improvement in the cement prices seen during
Q3FY12. Grasim expects to spend nearly Rs 47 bn in FY12 and Rs 63bn in FY13 for
cement division expansion as well as modernization. It plans to set up additional
clinker units at Chattisgarh and Karnataka and bulk packaging terminals across various
states and upgrade and modernize existing units. We, however, expect a capital
outlay of Rs 35bn and Rs 50 bn in our estimates to take into account capex done till
H1FY12.
VSF prices stabilized
Average VSF prices were nearly Rs 152/kg in Q1FY12 and witnessed a decline to Rs
125/kg in Q2FY12. Decline in VSF prices was led by fall in the cotton prices but
prices have now stabilized at Rs 125-130/kg. Going forward, cotton production during
this year and global macro-economic conditions will also be a key deciding factor
about pricing going ahead. Out of the total production, nearly 80% is sold domestically
while 20% is exported. However, domestic sales are also indirectly dependent
upon global markets.
Company's capex for expanding the VSF capacity is going as per schedule and it
includes setting up of a Greenfield plant of 1,20,000 tons at Vilayat at a total cost of
Rs 17bn and brownfield expansion of 36500 tons at Harihar plant and plant
upgradation at a total cost of Rs 4.5bn.
Cost pressures easing out but rupee depreciation may play spoilsport
Cost pressures were witnessed by the company in past couple of quarters primarily
led by higher coal as well as pulp prices. During Q2FY12, company had to source
coal from open market due to strike at Singareni collieries. Out of the total coal
requirement, company sources 35-40% from linkage coal while remaining is from
open markets and imports. Imported coal prices have witnessed a correction during
Q3FY12, however corresponding rupee depreciation till now is larger than the fall in
import prices.
Pulp prices have also witnessed a decline during Q3FY12. Company imports 45-50%
of its pulp requirement and imported average pulp prices have witnessed a correction
of 9% during Q3FY12 till date in comparison with Q2FY12 average pulp prices.
However, due to rupee depreciation, we don't expect the impact of fall in pulp
prices to come through fully. Average sulphur prices in Q3FY12 till date are higher
than Q2FY12 and this coupled with rupee depreciation will have some negative impact
on overall costs.
Financial outlook
n We tweak our estimates to factor in lower VSF volumes for the company due to
global macro uncertainty which can impact company's VSF offtake. We thus
expect revenues to grow at a CAGR of 10.3% between FY11-FY13.
n We expect margins to improve in the cement division due to recent price hikes
while for VSF, margins may remain at similar levels on a sequential basis. We
thus expect margins to be 20.9% and 21.4% for FY12 and FY13 respectively.
n Net profit growth is expected to be impacted by higher depreciation going forward.
We expect net profits of Rs 22.5 bn and Rs 23.6bn for FY12 and FY13 respectively.
Valuation and recommendation
n At current market price of Rs 2347, stock is trading at 9.1x P/E and 3.6x EV/
EBITDA for FY13 respectively.
n We remain positive on the company since we expect company to benefit from
improvement in cement volumes as well as stable pricing in cement. Rupee depreciation
may also offset decline in the VSF prices.
n We tweak our estimates slightly and continue to maintain BUY with a revised
price target of Rs 2665 on FY13 estimates.(Rs 2763 earlier)
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