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Grasim’s VSF business continued its impressive performance in 3QFY2011,
posting impressive operating profit of `389cr, which albeit fell by a marginal 4%
yoy. The cement business (represented by subsidiary UltraTech) also reported
better performance on a sequential basis, posting operating profit of `773cr (up
72.4% qoq). The consolidated bottom line declined by 13.5% yoy to `502cr due
to drop in the profits of the cement business. However, on account of our robust
outlook on the VSF business and attractive valuations of the cement business, we
upgrade the stock to Accumulate from Neutral.
VSF business posts OPM of 34.3%: Buoyed by a global shortage in cotton and
revival in the textile industry, the VSF business posted 17% yoy top-line growth of
to `1,129cr. Sales volume grew by 4% yoy to 84,621 tonnes, accompanied by a
12% improvement in per tonne realisations to `1,23,060. However, OPM of the
VSF business declined by 750bp yoy due to a substantial increase in input costs as
they could not be passed on entirely. During the quarter, costs of major inputs
such as pulp, sulphur and energy increased by 35%, 119% and 17%, respectively.
Outlook and valuation: Going ahead, we expect the VSF business to continue to
perform well, although margins could face pressure due to higher input costs. We
also expect cement demand to improve due to pick up in construction activity
during 4QFY2011. However, cement realisations would remain at current levels
due to excess capacity. We have valued the company’s 60.3% stake in UltraTech
at an average EV/tonne of US $110, after providing 20% holding company
discount, to arrive at a value of `1,515/share. We have valued the VSF business
at 5.5x EV/EBITDA on FY2012E estimates. We upgrade the stock to Accumulate
from Neutral with a Target Price of `2,521.
Segmental performance
Cement business suffers from fall in realisation
Revenue of the company’s cement business rose by 8.5% yoy to `3,949cr, aided
by the merger of Dubai-based Star Cement w.e.f. 3QFY2011. Star Cement
reported net revenue of `191cr. Cement sales volume increased by ~10% to
9.17mn tonnes, primarily on account of 0.92mn tonnes of dispatches made by
Star Cement. For 3QFY2011, domestic net realisation per tonne fell by 2% yoy.
However, realisations were higher by ~12% on a qoq basis.
VSF business posts good results once again
Net sales of the VSF business grew by 17% yoy, aided largely by 12% growth in
realisation to `123/kg. Realisations improved due to cotton shortage globally and
the general revival of the textile industry. The increase in spot pulp prices also
resulted in higher VSF prices in China. Sales volumes rose by 4% yoy to 84,621MT.
However, operating profit of the division declined by 4% yoy to `389cr due to a
steep increase in spot pulp prices. Higher pulp prices, however, resulted in a better
performance of the company’s pulp joint venture, which posted operating profit of
`42cr in 3QFY2011 as against `6cr in 3QFY2010.
Chemical business
Net revenue of the chemical business rose by 22% yoy to `148cr during
3QFY2011 due to a 9% increase in sales volume to 67,136 tonnes. This division,
which posted its highest-ever sales volume during the quarter, reported capacity
utilisation of 104%. Realisations also improved by 10% yoy to `18,125/tonne,
aided by improvement in caustic prices in international markets. The division’s
operating profits rose by 11% yoy to `31cr. OPM dropped by 200bp yoy to 21.3%
due to higher energy costs.
Investment arguments
A diversified play with presence in cement and textiles: Grasim is a diversified
player with interests in the cement and textile business. The company’s subsidiary,
UltraTech is India’s largest cement player with a pan-India presence, having
capacity of 52mtpa (incl. Star Cement’s capacity of 3mtpa). Further, UltraTech,
which enjoys good brand equity, is expected to be insulated from wide variation in
regional demand and price volatility due to its pan-India presence. Going ahead,
on a consolidated basis, Grasim’s cement business is expected to be driven by
large-scale capacity addition.
Strong recovery in VSF business to boost profitability: Grasim, with total VSF
capacity of 334,000 tonnes, is the third-largest player in the world, with 11%
market share. This division made a strong recovery in FY2010, after struggling in
FY2009. The strong recovery in the VSF market was largely on account of the fast
recovery of the textile industry in emerging markets and a decline in global cotton
production. From the lows of 4QFY2009, VSF realisations recovered by 46% to
`123/kg currently.
The company proposes to expand its VSF operations by setting a new 120,000tpa
VSF plant at Vilayat, Gujarat, with an investment of `1,690cr. Land for the project
has been obtained and the environment clearance is also in place. This plant is
expected to be operational in FY2013E. The company is also looking at backward
integration in Vilayat, by setting up a chemical and captive power plant at a cost of
`772cr. Further, the company is expanding its Harihar facility by 36,500tpa at a
capex of `449cr. The company’s VSF business is well integrated with 75% of the
pulp requirement and 100% of the caustic soda requirement sourced captively.
Outlook and valuation
We expect Grasim’s top line to register a moderate CAGR of 3.4%, primarily due
to subdued realisation in its cement business. VSF demand is likely to remain
stable in the medium term on the back of improved demand, fallowing the fast
recovery in the textile sector in emerging markets coupled with the decline in
global cotton production. Demand is also expected to be boosted by use of VSF in
various allied applications such as non woven. However, higher input prices (pulp
and sulphur) are expected to exert pressure on margins.
At current levels, the stock trades at a P/E of 9.4x and an EV/EBITDA of 5x on
FY2012E estimates. We have valued the company’s 60.3% stake in UltraTech at
an average EV/tonne of US $110, after providing 20% holding company discount,
to arrive at a value of `1,515/share. We have valued the VSF business at 5.5x
EV/EBITDA on FY2012E estimates. We upgrade the stock to Accumulate from
Neutral with a Target Price of `2,521.
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Grasim Industries – 3QFY2011 Result Update
Angel Broking upgrades Grasim Industries to Accumulate from Neutral with a Target Price of Rs. 2,521.
Grasim’s VSF business continued its impressive performance in 3QFY2011,
posting impressive operating profit of `389cr, which albeit fell by a marginal 4%
yoy. The cement business (represented by subsidiary UltraTech) also reported
better performance on a sequential basis, posting operating profit of `773cr (up
72.4% qoq). The consolidated bottom line declined by 13.5% yoy to `502cr due
to drop in the profits of the cement business. However, on account of our robust
outlook on the VSF business and attractive valuations of the cement business, we
upgrade the stock to Accumulate from Neutral.
VSF business posts OPM of 34.3%: Buoyed by a global shortage in cotton and
revival in the textile industry, the VSF business posted 17% yoy top-line growth of
to `1,129cr. Sales volume grew by 4% yoy to 84,621 tonnes, accompanied by a
12% improvement in per tonne realisations to `1,23,060. However, OPM of the
VSF business declined by 750bp yoy due to a substantial increase in input costs as
they could not be passed on entirely. During the quarter, costs of major inputs
such as pulp, sulphur and energy increased by 35%, 119% and 17%, respectively.
Outlook and valuation: Going ahead, we expect the VSF business to continue to
perform well, although margins could face pressure due to higher input costs. We
also expect cement demand to improve due to pick up in construction activity
during 4QFY2011. However, cement realisations would remain at current levels
due to excess capacity. We have valued the company’s 60.3% stake in UltraTech
at an average EV/tonne of US $110, after providing 20% holding company
discount, to arrive at a value of `1,515/share. We have valued the VSF business
at 5.5x EV/EBITDA on FY2012E estimates. We upgrade the stock to Accumulate
from Neutral with a Target Price of `2,521.
Conference call highlights
Grasim expects all-India cement demand growth to be 7% for FY2011 and
8–10% for FY2012, as against 10.8% and 9% in FY2010 and FY2009,
respectively. The company expects demand in the northern and eastern
regions to pick up going ahead, aided by government initiatives to boost
infrastructure and rural housing. Thus, the company believes there is scope for
a price hike in the northern and eastern regions.
Work on brownfield expansion at Malkhed and Raipur with capacity of
9.2mtpa (including 95MW of Thermal Power Plant, five split grinding units,
and bulk terminals) at an approximate cost of `5,600cr is expected to begin
as planned in 4QFY2011. The company expects the cement plants to be
operational by FY2014. Additionally, the company has planned capex of
`2,200cr towards modernisation and upgradation; and `1,200cr towards
materials and logistics infrastructure.
Grasim is setting up 1,20,000tpa at Vilayat, Gujarat. The company is also
expanding its capacity in Harihar, Karnataka, by 36,500tpa at a cost of
`449cr. Grasim expects these expansions to be completed by FY2013.
The company’s power and fuel costs increased substantially during the
quarter, on account of a spurt in global coal prices. As per the company,
which also indicated that 35% of its requirements are met by imported coal,
average cost of imported coal consumed during the quarter stood at US
$115/tonne and is expected to go up to US $130/tonne in 4QFY2011. The
company has coal inventory, which would last till the end of February 2011.
Grasim was impacted by the hike in pulp prices, a major raw material for VSF
manufacturing. The company indicated that it largely procures pulp under
long-term basis, which has seen a price hike of 15–20% as against the
40–50% hike in spot prices.
Segmental performance
Cement business suffers from fall in realisation
Revenue of the company’s cement business rose by 8.5% yoy to `3,949cr, aided
by the merger of Dubai-based Star Cement w.e.f. 3QFY2011. Star Cement
reported net revenue of `191cr. Cement sales volume increased by ~10% to
9.17mn tonnes, primarily on account of 0.92mn tonnes of dispatches made by
Star Cement. For 3QFY2011, domestic net realisation per tonne fell by 2% yoy.
However, realisations were higher by ~12% on a qoq basis.
VSF business posts good results once again
Net sales of the VSF business grew by 17% yoy, aided largely by 12% growth in
realisation to `123/kg. Realisations improved due to cotton shortage globally and
the general revival of the textile industry. The increase in spot pulp prices also
resulted in higher VSF prices in China. Sales volumes rose by 4% yoy to 84,621MT.
However, operating profit of the division declined by 4% yoy to `389cr due to a
steep increase in spot pulp prices. Higher pulp prices, however, resulted in a better
performance of the company’s pulp joint venture, which posted operating profit of
`42cr in 3QFY2011 as against `6cr in 3QFY2010.
Chemical business
Net revenue of the chemical business rose by 22% yoy to `148cr during
3QFY2011 due to a 9% increase in sales volume to 67,136 tonnes. This division,
which posted its highest-ever sales volume during the quarter, reported capacity
utilisation of 104%. Realisations also improved by 10% yoy to `18,125/tonne,
aided by improvement in caustic prices in international markets. The division’s
operating profits rose by 11% yoy to `31cr. OPM dropped by 200bp yoy to 21.3%
due to higher energy costs.
Investment arguments
A diversified play with presence in cement and textiles: Grasim is a diversified
player with interests in the cement and textile business. The company’s subsidiary,
UltraTech is India’s largest cement player with a pan-India presence, having
capacity of 52mtpa (incl. Star Cement’s capacity of 3mtpa). Further, UltraTech,
which enjoys good brand equity, is expected to be insulated from wide variation in
regional demand and price volatility due to its pan-India presence. Going ahead,
on a consolidated basis, Grasim’s cement business is expected to be driven by
large-scale capacity addition.
Strong recovery in VSF business to boost profitability: Grasim, with total VSF
capacity of 334,000 tonnes, is the third-largest player in the world, with 11%
market share. This division made a strong recovery in FY2010, after struggling in
FY2009. The strong recovery in the VSF market was largely on account of the fast
recovery of the textile industry in emerging markets and a decline in global cotton
production. From the lows of 4QFY2009, VSF realisations recovered by 46% to
`123/kg currently.
The company proposes to expand its VSF operations by setting a new 120,000tpa
VSF plant at Vilayat, Gujarat, with an investment of `1,690cr. Land for the project
has been obtained and the environment clearance is also in place. This plant is
expected to be operational in FY2013E. The company is also looking at backward
integration in Vilayat, by setting up a chemical and captive power plant at a cost of
`772cr. Further, the company is expanding its Harihar facility by 36,500tpa at a
capex of `449cr. The company’s VSF business is well integrated with 75% of the
pulp requirement and 100% of the caustic soda requirement sourced captively.
Outlook and valuation
We expect Grasim’s top line to register a moderate CAGR of 3.4%, primarily due
to subdued realisation in its cement business. VSF demand is likely to remain
stable in the medium term on the back of improved demand, fallowing the fast
recovery in the textile sector in emerging markets coupled with the decline in
global cotton production. Demand is also expected to be boosted by use of VSF in
various allied applications such as non woven. However, higher input prices (pulp
and sulphur) are expected to exert pressure on margins.
At current levels, the stock trades at a P/E of 9.4x and an EV/EBITDA of 5x on
FY2012E estimates. We have valued the company’s 60.3% stake in UltraTech at
an average EV/tonne of US $110, after providing 20% holding company discount,
to arrive at a value of `1,515/share. We have valued the VSF business at 5.5x
EV/EBITDA on FY2012E estimates. We upgrade the stock to Accumulate from
Neutral with a Target Price of `2,521.
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