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EARNINGS REVIEW
Grasim Industries (GRAS.BO)
Neutral
Below expectations; cement business drags down profit
What surprised us
Grasim Industries reported 2QFY11 consolidated net income of Rs3.2bn (-
44% qoq, -59% yoy), 13% below our expectations and Reuters consensus.
2QFY11 EBITDA came at Rs7.8bn, down 49% yoy, primarily due to poor
operating performance by Ultratech (60% held cement subsidiary). Cement
EBITDA margins were down 1800bps to 14% on lower realizations (-18%
yoy) and higher fuel costs (+24% yoy). Performance of the VSF business
was also muted - volumes were down 9% yoy, due to shutdowns given the
water shortage. While realizations were up 11% yoy, margins were down
960bps to 32% due to higher pulp costs (up 52% yoy). The company
announced additional capacity will be added at Vilayat to 120k tpa (80k
previously announced) and brownfield capacity expansion of 36.5k at
Karnataka, taking total VSF capacity to 490.5k by FY13 (Capex:Rs21bn).
What to do with the stock
While we expect the VSF business to be strong in 2H on improved realizations
and better volumes, we believe the main growth driver will continue to be
cement (76% of EBIT in FY10) until FY13 (the next phase of VSF capacity
expansion). Management highlighted that while they expect cement margins
to improve from these levels (currently the lowest quarterly margin in five
years) margins will remain relatively muted until FY12. We fine tune our
FY11E-FY13E estimates post the Ultratech restructuring. We raise our 12-
month SOTP based price target to Rs2,159 from Rs2,014 to incorporate ETA
Star Cement’s 3mn ton capacity (acquired by Ultratech in 2QFY11) and retain
our Neutral rating. Upside risks include faster-than-expected recovery in
cement prices; downside risks include muted volumes in VSF and cement.
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