Management Visit Update Grasim Industries Buy:: Centrum

Management Visit Update

Grasim Industries

Buy

Target Price: Rs3,541

CMP: Rs3,111

Upside: 13.8%

New capacities to aid volume growth, maintain Buy

We met with the management of Grasim Industries to get an update on the VSF and Cement businesses and progress on capital expenditure plans. The key takeaways are given below:

m  Price increase of ~3% in Q2FY13: The management indicated that VSF price has been increased by Rs4/kg in Q2FY13. Current VSF price is ~RS132/kg. Cotllook A index has recovered to ~85 cents/pound from the lows of 78cents/pound on June 2, 2012. In India, cotton price recovered from Rs93/kg in June ’12 to Rs98/kg as of now. International cotton price is at 84cents/pound against 82cents/pound in June ’12. Historically, VSF price has been at ~50% premium to cotton price over last 7 years and the premium stands at ~23% as of now. As per the management, VSF price should command a premium of ~30% to cotton price and hence, we do not foresee sharp volatility in VSF price in the near-term. As per the management, drought like conditions in the US, Brazil and other cotton producing belts led to improvement in prices and the crop in the next year will be the influencing factor for cotton prices. The management indicated that Chinese players are making losses at current utilization rate and VSF prices and hence, this would protect the fall in international VSF price.

m  New capacities in the VSF segment on schedule: The company is increasing its VSF production capacity by 156KTPA (~47% of current installed capacity of 334KTPA) by Q4FY13E. The expansion plans are on schedule and we believe production will commence from Q1FY14E from the expanded capacities. We believe VSF sales volume will grow by ~11% in FY14E and FY15E.  The company is also expanding Caustic Soda production volume by 182KTPA to support the increase in VSF capacity. The planned expenditure for VSF capacity augmentation was Rs37.4bn, of which Rs9.6bn was spent till FY12. Post-expansion, Grasim will have 15% market share in global VSF industry against 9% at present.

m  Cement demand in the country to grow at 8%; new capacity addition in the industry should be 20mt each over the next three years:  The management believes that cement demand in the country would grow at ~8% in FY13E. The key drivers of demand would be rural and semi-urban housing construction activities. Any improvement in infrastructure activities from the government side will further help demand growth. With the revival of monsoons, the management is hopeful that the industry will achieve its expected demand growth. It believes the industry will add 20mt of new capacity each year over the next three years.

m  New capacities in the cement business on track: The management indicated that the new capacities of 9.2mt (4.8mtpa at Raipur, Chattisgarh and 4.4mtpa at Malkhed, Karnataka) in the cement business were on track and should get commissioned by Q1FY14E. The capex in the cement business was Rs119.4bn, of which the company had spent Rs32.2bn till FY12. The management indicated that the target market from the Karnataka capacity would be Maharastra and Gujarat and hence, oversupply in the South region would not impact volume growth from this plant. We believe sales from new plants will start from Q4FY14E. We expect cement sales volume growth of 7% and 10% in FY14E and FY15E respectively.

m  Estimates revised upwards considering new capacity for VSF and higher VSF price:  We have revised our EPS estimates upwards by 10.4%/16.1% to Rs334.4/Rs386.1 for FY13E and FY14E respectively for the company considering volume growth from new plants and higher VSF prices.

m  Stock attractively valued, maintain Buy with a revised price target: At the CMP, the stock trades at 8x FY14E EPS, 4x EV/EBITDA and 1.4x P/BV. We believe that the company would turn free cash flow positive in FY14E after experiencing negative free cash flow in FY13E. RoCE of the company will improve to 14.2% by FY15E against 12% in FY12. Any revival in global economy will help the company gain market share for its expanded capacity in the VSF segment earlier than our expectation. We maintain Buy on the stock with a revised price target of Rs3,541 (earlier: Rs3,124), upside of 13.8% from its CMP.

Thanks & Regards, 

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