Grasim Industries- Upgrade to Buy: Attractive Cement Valuations; Citi

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


Grasim Industries (GRAS.BO)
Upgrade to Buy: Attractive Cement Valuations; VSF Doing Well
 Upgrade to Buy — Grasim offers exposure to both cement and VSF. In our
opinion it is the best way to gain exposure to the India cement sector, and it
offers value even after applying a 10% holding company discount to
replacement cost to value its cement capacity of 49mtpa (Grasim holds 60%
in UltraTech Cement (UTCL)). Its VSF/chemical business (30-35% of cons.
EBITDA) offers some downside protection and should generate steady
EBITDA of Rs14-16bn pa. Given what we view as an unjustified valuation
dissonance – at a CY11E EV/t of US$82 vs. replacement cost of US$120 –
we upgrade Grasim to Buy/Low Risk (1L) from Sell/Medium Risk (3M).
 Raising TP to Rs2,640 — We continue to use SOTP to value Grasim but
raise our target price to Rs2,640 (from Rs2,232). We value its 49mtpa
cement capacity using an EV/tonne of US$120/t for Dec-11E (prev. US$85/t
for Sep-10E), in-line with replacement costs (vs. 15% discount prev.), but
apply a 10% holding company discount due to the changed group structure,
to get a value of Rs1,570 for Grasim’s 60% holding in UTCL. We value
Grasim’s other businesses (VSF/Chemicals) at an EV/EBITDA of 6x Dec-11E,
a ~10% discount to comparable hard commodity businesses, giving a value
of Rs1,070. Our TP implies a Dec-11E EV/EBITDA of 6.2x and P/E of 12x.
 Cement update and outlook — UTCL plans to set up 25mtpa of cement
capacity by 2015 to maintain market share. It announced plans to start work
by end-FY11 on two 4.6mtpa brownfield capacities (Chhattisgarh &
Karnataka) at a total capex of Rs56bn (US$135/t, higher than average as it
includes bulk terminals and split grinding units), with completion expected
by end-FY13. While prices have recovered lost ground recently and should
remain firm in 3QFY11, we believe a correction is likely next quarter as there
is more than adequate supply and the market is still fragmented.
 VSF outlook — Current capacity is 334ktpa and accounts for 11% of the
global market. We estimate this will rise to 414ktpa by 2013. VSF is well
integrated and should generate 30%+ EBITDA margins. Demand is under
some pressure but margins remain robust as prices have been hiked and
Grasim gains from its integrated capacity. Key risk factors include prices of
cotton/PSF, pulp/caustic soda prices, and Chinese VSF output.
 Downside risks — (1) Sharp downward rating for cement stocks and cement
pricing; (2) Fall in VSF prices and demand; 3) Capacity additions.