Consolidated results in-line; Standalone margin tad lower on low VSF realization- Grasim Industries :: Centrum

Consolidated results in-line; Standalone margin tad lower on low VSF realization
Grasim Industries’ Q4FY13 consolidated operating profit was at Rs14.6bn (vs. est. Rs15.3bn) and adjusted profit was at Rs6.74mn (est. Rs6.66bn). OPM at 19.2% was 1.2pp below our estimates led by lower margin in the standalone business (15.6% vs. est. 16.6%). In the standalone business, the company reported operating profit of Rs2.1bn (est. Rs2.3bn) and adjusted profit of Rs2.1bn (est. Rs2.2bn) primarily due to 2.5% QoQ fall in VSF realization. OPM in the standalone segment remained flat at 15.6% on a YoY basis. Despite near-term challenges in the VSF business due to pressure on global prices led by oversupply in the Chinese market and high cotton inventory globally, we remain positive on the company from a long-term perspective as we believe that capacity expansion in both key segments (cement and VSF) will aid volume growth and thus, better profits in future. We maintain Buy on the stock with a revised price target of Rs3,843 (earlier: Rs3,991).
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Cement and Chemical business perform better; VSF performance subdued: Though, consolidated revenue increased 4.8% YoY, operating profit declined 3.4% YoY to Rs14.6bn primarily due to lower profitability of the VSF segment. In the VSF business, EBIT declined 27.7% YoY during the quarter. The chemical segment reported EBIT increase of 81.5% YoY, whereas, EBIT from the cement business was up 1.1% YoY. EBITDA margin was down 1.6pp YoY to 19.3%. Adjusted PAT (adjusted for Rs2bn income from sale of equity investment in subsidiaries) declined 16.7% YoY to Rs6.7bn.
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Standalone OPM slightly below estimates, profit largely in-line: The company reported standalone revenue of Rs13.8bn (est. Rs13.7bn), operating profit of Rs2.1bn (est. Rs2.3bn) and OPM of 15.6% (est. 16.6%). Lower than estimated margin was primarily due to 2.5% QoQ decline in VSF realization. Adjusted profit (adjusted for Rs2bn in income from sale of equity investment in subsidiaries) during the quarter was at Rs2.1bn (est. Rs2.2bn).
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Higher raw material costs and lower realization lead to decline in VSF margins: Revenue from the VSF segment declined 0.9% YoY to Rs12.1bn led by 1.5% YoY drop in realization to Rs119/kg. Sales volume of VSF was up 0.3% YoY (21.1% QoQ) to 95,161 tonnes. Led by lower realization and higher raw material cost (caustic soda and pulp price), EBITDA of this segment declined 6.9% YoY to Rs2,160mn and operating margin declined 1.2pp YoY to 17.7%.

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New capacities in the VSF segment to drive volume growth: The company is increasing its VSF production capacity by 156KTPA (~47% of FY12 installed capacity of 334KTPA) by Q1FY14E. It has completed 18,000-tonne brownfield expansion in the current quarter already. The management expects production from new capacity to start from Q2FY14E. We believe VSF sales volume will grow by ~11% in FY14E and FY15E.
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Earning estimates revised downwards: We have revised EPS estimates downwards by 5.2%/6.4% for FY14E/FY15E considering a) 9.7%/6.2% cut in earning est. of UltraTech and b) assuming lower VSF realization (Rs120/kg for FY14E against Rs124 earlier and Rs124/kg for FY14E vs. Rs128 earlier).
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Maintain Buy: At the CMP, the stock trades at 8.7x FY14E EPS, 4.4x EV/EBITDA and 1.4x P/BV. We maintain Buy on the stock with a price target of Rs3,843, an upside of 30.7% from its CMP. We have assigned 40% holding company discount for its holding in UltraTech and other subsidiaries. We have valued the standalone business at 10x EPS.