Grasim - Lower volumes, high cost hit VSF margins; Buy : Religare

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


Grasim Industries Ltd
Lower volumes, high cost hit VSF margins
Grasim Industries (Grasim) results were largely in line at the topline as well as
bottomline. The company reported a topline de-growth of 2.9% YoY to Rs 9.3bn,
and a bottomline decline of 5.2% to Rs 2.8bn. Higher cost resulted in a 1130bps
decline in EBITDA margins to 28.3%. In order to reflect lower operating profits we
have trimmed our earnings estimate for FY11E/FY12E by 3%/6% respectively. We
believe the company’s performance is expected to improve in the coming quarters
as VSF prices have witnessed an increase in the international markets. Further the
holding company discount of 50% to Ultratech still provides room for upside.

Rolling forward to Sep’11, we have a revised target price of Rs 2,900 (earlier
Rs 2,575) based on SoTP valuation. We maintain our Buy rating on the stock.
VSF volumes decline, realisations improve YoY: Grasim’s topline declined by
2.9%% YoY to Rs 9.3bn, driven a 1% increase in VSF revenues to Rs 8.5bn and
9% lower revenues in the chemical business. While VSF realisations improved
by 11% YoY, volumes declined by 9% on account of its extended shutdown of
its Nagda plant for 25 days in Q2FY11.

EBITDA margin declined 1130bps YoY: Grasim’s EBITDA margin declined
1130bps YoY to 28.3%, as VSF operating margin declined by 960bps to 31.4%
as high costs hit the company’s profitability. Going forward we believe EBITDA
margins is likely to improve as VSF prices have increased in the international
market and cotton prices continue to stay buoyant. Although the management
has indicated only Rs 3/kg increase in VSF prices till date, we believe this could
see a rise in the coming months.

Higher other income restricts decline in PAT YoY: Despite subdued operating
performance the company’s Adj PAT declined only by 5% to Rs 2.8bn mainly on
account of higher other income. The company received dividend income from
it’s cement subsidiary (Samruddhi & Ultratech) which resulted in 69% YoY and
174% QoQ increase in other income.

Maintain Buy; sensitivity indicates upside potential: We have valued the cement
business based on a) UltraTech’s target price and a holding company discount of
25% as we continue to believe that a higher discount is unwarranted. b) The VSF
and chemical businesses have been valued at an EV/EBITDA of 4x one-year
forward and liquid investments. We arrive at a revised Sep’11 target price of
Rs 2,900 as against Rs 2,575 earlier.

Our sensitivity analysis, on that impact of a decline in UltraTech’s share price
from current levels, reveals an upside potential in the 9-27% range for Grasim.
We therefore maintain a Buy on Grasim .