Grasim Industries’ Q3FY13 Consolidated results in line:: Centrum

Consolidated results in line; Standalone business
disappoints
Grasim Industries’ Q3FY13 consolidated profit at Rs5,492mn was inline
with our estimate of Rs5,471mn driven by better than estimated
profit of its subsidiary UltraTech which reported results earlier.
However, standalone performance was below estimates with EBITDA
at Rs2.2bn vs. est. Rs2.6bn and op. margin at 17.9% vs. est. 20%.
Lower profit of standalone business was due to 32.3% YoY decline in
op. profit of VSF business led by ~5% YoY drop in realization and
higher caustic price. EBITDA margin of VSF business was down 7.2pp
YoY to 18.1%. Though there remains near-term challenges in the VSF
business due to pressure on global prices led by oversupply in Chinese
market and depressed cotton price due to higher inventory, we remain
positive on the company from a long-term perspective as we believe
that capacity expansions in both key segments (cement and VSF) will
aid volume growth and thus offer better profits in future. We maintain
Buy on the stock with a revised price target of Rs4,014 (earlier:
Rs4,210).
Profit declines due to pressure on VSF business: Though, conso. revenue
increased 7.3% YoY, op. profit declined 4% YoY to Rs12.6bn primarily due to lower
profitability of the VSF segment. In the VSF business, EBIT declined 57.7% YoY
during the quarter. Chemical segment reported EBIT increase of 37.4% YoY,
whereas, EBIT from cement business was up 3.2% YoY. EBITDA margin was down
2.2pp YoY to 18.7% led by a steep decline in EBIT margin of VSF segment (8.7%
against 21.7% in Q3FY12). EBIT margin of chemical segment was at 22.3% against
18.3% in Q3FY12. Adjusted PAT declined 7.3% YoY (and 11.4% QoQ) to Rs5.5bn.
Higher raw material costs and lower realization leads to decline in VSF margins:
Revenue from the VSF segment declined 5.1% YoY to Rs10.3bn led by ~5% YoY drop
in realization to ~Rs122/kg. Sales volume of VSF was up 0.5% YoY to 78,579 tonnes.
Led by lower realization and higher raw material cost (higher caustic price), EBITDA of
this segment declined 32.3% YoY to Rs1,880mn and op. margin declined 7.2pp YoY to
18.1%.

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Con-call key take-aways: 1) Production loss in Harihar, Karnataka plant is expected
for 40-50 days due to non-availability of water led by lower rain in Karnataka. Phase
I of Harihar plant expansion was completed in Sep ’12 taking the capacity to
1,90,000 tonnes. 2) The management does not expect a sharp increase in VSF price
in the near-term even though the inventory pipeline remains low at the current
stage. This is because of overcapacity in China and unreasonably low selling prices
there. 3) However, it believes that most players in China will be passing through
challenging times at current VSF prices and hence, it expects limited downside to
VSF prices. 4) Current global price of VSF ranges between $1.95-$2.05/kg.
Sequentially, global price is down ~5% QoQ. In India, VSF price is down ~5% YoY
supported by weak rupee compared to ~14% drop in global prices. 5) Current
domestic price is slightly lower than the average selling price of Q3FY13. However,
there has been some recovery in January compared to December ’12. 8) Star
Cement is currently operating at 90% utilization rate and EBITDA/tonne is in the
range of Rs400-450/tonne.
Maintain Buy: At the CMP, the stock trades at 8.4x FY14E EPS, 4.1x EV/EBITDA and 1.4x
P/BV. We maintain Buy on the stock with a price target of Rs4,014, an upside of 33.5%
from its CMP. We have assigned 40% holding company discount for its holdings in
UltraTech and other subsidiaries. We have valued standalone business at 10x EPS.