Grasim Industries - Annual Report Highlights :: JPMorgan

GRASIM’s cash flow generation should materially pick up, in our view, as the
large capex in VSF gets completed and is commissioned over the coming
quarters. We believe at the current share price, the underlying cement assets
are at an implied value of ~$93/T. We maintain our OW rating and increase
our Jun14 PT to Rs3610.

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 VSF segment margin collapsed in FY13 but integrated model means
overall impact muted: FY13 was a tough year for the VSF segment given
the pricing pressure and higher costs. We estimate margins declined
~640bps y/y, while VSF EBITDA fell 20%. Volumes increased ~9% y/y.
However, this does not fully reflect the benefits of integration. A large part
of the cost pressure was driven by high caustic prices, where GRASIM is
integrated. As a result, the chemical segment reported EBITDA growth of
+52% y/y and margins expanded by ~520bps. On a fully integrated basis,
GRASIM’s standalone EBITDA was down ~14%, while margins declined
~460bps. We expect VSF volumes and margins to improve going forward.
ASP/t would be aided by INR depreciation.
 Large capex in VSF: On a standalone basis, GRASIM spent Rs24bn in
capex, coming from internal accruals and existing cash balance. A bulk of
the project spending is done, in our view, and the benefits of the ~50%
capacity expansion in VSF should start flowing through.
 Net cash comes off to Rs4.3bn v/s Rs16.5bn; should start picking up
again: Given the high capex in the VSF business, net cash reduced sharply
in FY13. We expect cash generation to increase going forward, while capex
reduces. GRASIM faces a similar issue at its subsidiary UTCEM, in terms
of how to deploy its steady cash generation. While UTCEM is likely to keep
adding cement capacity (or buy), there is no such clear direction from
GRASIM regarding its VSF segment. The balance sheet with its net cash
position could support acquisitions, but GRASIM has so far shown no
inclination for it and has focused on its organic VSF pipeline
 We maintain OW with a revised Jun14 PT of Rs3610. Key risk is any
sharp decline in VSF prices and therefore, profitability of the standalone
business.