Grasim - Cement subsidiary drags consolidated earnings.:: Kotak Sec

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Grasim Industries (GRASIM)
Cement
Cement subsidiary drags consolidated earnings. Grasim’s consolidated earnings
reflected the poor quarterly performance of its cement subsidiary even as standalone
results met expectations. Grasim currently trades at 27% discount to the CMP of its
ownership in cement subsidiaries, which coupled with reasonable valuation of 3X on
FY2012E EV/EBITDA further strengthens our positive stance. We maintain our ADD
rating and target price of Rs2,500.


Disappointment on consolidated numbers reflective of weakness in cement
Grasim reported revenue of Rs44.4 bn (-12% qoq, 5% yoy), operating profit of Rs7.2 bn (-45%
qoq, -51% yoy) and net income of Rs3.2 bn (-44% qoq) against our estimate of Rs43.5 bn, Rs9.3
bn and Rs4.1 bn, respectively. We note that net income numbers are not comparable on yearly
basis due to dilution of ownership in the cement business in favor of Grasim shareholders. Lowerthan-
estimated EBITDA was primarily on account of higher input costs in both cement and VSF
business. EBITDA margins in cement business contracted sharply from 25.9% in 1QFY11 to 14.9%
in 2QFY11 while contraction in VSF business was less acute on account of stable realizations.
Standalone revenues post de-merger (VSF and chemicals) was Rs9.3 bn with operating profit of
Rs2.6 bn and net income of Rs2.8 bn, respectively for 2QFY11. Standalone PAT was boosted by
higher other income on account of dividend income from Grasim’s cement subsidiaries.
Notwithstanding cement weakness, we continue to like Grasim
Grasim’s cement business (housed under Ultratech) witnessed a significantly weak quarter led by
lower volumes and realizations and inflated input costs. However, we maintain our positive stance
as, (1) Grasim’s CMP implies a holding company discount of 27% for its 60% holding in UTCEM,
(2) Grasim trades at relatively inexpensive valuations of 3X EV/EBITDA on FY2012E EBITDA and (3)
stable earnings from VSF business cushions consolidated earnings from the impact of a weak
cement cycle.
Maintain ADD with target price of Rs2,500
We maintain our ADD rating with a target price of Rs2,500/share. We value the cement business
at 5.5X EV/EBITDA on FY2012E implying an EV/ton of US$112/ton on FY2012E production and
factor an additional ‘holding-company’ discount for 60% holding in UTCEM. We value the steady
cash streams from VSF and allied chemicals business using DCF model. On comparative valuations
on FY2011E, our assigned valuation implies 5.1X EV/EBITDA for chemicals business an 4X
EV/EBITDA for the VSF business. We have revised our EPS estimate to Rs195/share (previously
Rs229/share) in FY2011E and to Rs239/share (previously Rs273/share) in FY2012E, taking
cognizance of higher input costs and weak realizations for the cement business.