Grasim Industries, 2QFY11 results below expectation- ADD :: IIFL,

Visit http://indiaer.blogspot.com/ for complete details �� ��


2QFY11 results below expectation
Grasim’s (standalone) net sales declined 68% YoY to Rs9.3bn (primarily on account of de-merger of
the cement business); PAT declined 59% YoY to Rs2.8bn against our expectation of Rs2.6bn, as
higher-than-expected other income boosted profits. EBITDA margin was lower than our expectation as
VSF realisation declined QoQ, against our expectation of an increase in realisation. In the post-result
call, management said prices of VSF had risen ~3% since the start of the current quarter. VSF prices in
international markets have increased sharply in the past 4-5 weeks, as cotton prices has risen, given
the likely shortage in production. We upgrade our FY11 EPS estimate for Grasim by 2% to factor in an
likely increase in VSF realisation in 4QFY11. However, we downgrade our FY12 EPS estimate by 4%,
as we expect earnings of the cement subsidiary to remain under pressure in FY12.
VSF realisation increases YoY, but at a lower pace than expected: VSF realisation increased 11% YoY
on account of strong demand due to tightness in global cotton supply (VSF is a competing product to cotton).
Global cotton and VSF prices have increased sharply in the past 4-5 weeks on account of a likely shortage of
cotton in FY11, as floods have severely damaged cotton crops in Pakistan. Grasim’s management said VSF
prices had risen ~3% since the start of the currenty quarter; we expect further increases in VSF realisation in
4QFY11, as cotton prices are likely to remain high at current levels for the next 1-2 quarters.
Water shortage negatively affects VSF volumes: VSF volumes declined 9% YoY for 2QFY11 as its Nagda
plant was shut on account of water shortage for 25 days, against eight days in 2QFY10. We expect volumes
to increase in the quarters ahead, as the monsoon was normal this year. We have factored in volume growth
at 3% in FY11 and 7% in FY12. Grasim has upped its VSF capacity expansion plans from 80,000tpa to
156,500tpa on account of strong demand for VSF. After these expansions, expected to be completed by
FY13, Grasim’s VSF capacity will increase from the current 0.34mtpa to 0.49mtpa.





Margins decline; we expect uptick in 2H: EBITDA margin declined
580bps YoY to 28.3%, primarily because the VSF division’s margin
declined as a result of a sharp increase in raw-material prices. We
expect margins to improve sequentially in 2H, as costs are likely to
remain stable and prices to increase on account of a sharp increase in
cotton and VSF prices in the international market in the past few weeks.
Cement continues to worry: Grasim’s cement subsidiary (UltraTech
Cement) reported a poor set of numbers leading to a 51% YoY decline
in consolidated EBIDTA. We expect tough times for the cement
subsidiary to continue in FY12 as well.