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Grasim Industries Ltd
Overweight
GRAS.BO, GRASIM IN
Cost pressures emerging in VSF but demand, ASP outlook strong
• Operating results slightly ahead: Grasim’s 3QFY11 Consol EBITDA of
Rs12.0bn was slightly ahead of JPMe at Rs11.5bn and well above the consensus
at Rs10.6bn. Besides the inline 3QFY11 results reported by UTCEM and strong
performance from the VSF segment, the company’s JVs contributed Rs448MM
to the consol EBITDA during the quarter. Reported consol PAT was Rs5.0bn;
inline with our estimates of Rs4.9bn. Standalone tax rate of 27.8% was lower
than our expectation of 25%.
• VSF- demand and realizations strong, but increasing cost pressures: VSF
segment reported EBITDA at Rs3.9bn (-4% y/y, +42% q/q) with sales volumes
increasing 4% y/y and 25% q/q, while ASP increased by 12% y/y and 6% q/q.
However, EBITDA margins (standalone) declined y/y at 34.4% v/s 41.9% in
Q3FY10. GRASIM highlighted the cost pressures across the chain with pulp
costs +35%, sulfur costs +119%, and energy costs +17%. On a consolidated
VSF segment including the pulp JV, EBITDA was up 2% y/y.
• VSF- Demand and ASP outlook remains strong: We agree with
management’s expectations of continued strength in the VSF segment. Demand
outlook remains robust with the textile sector recovering. Importantly,
continued elevated cotton prices are a strong positive for VSF prices, given that
VSF is a substitute for cotton. Increasing spot pulp prices is also positive for
VSF prices, as it pushes up the cost curve for VSF in China. However, cost
pressures are likely to limit margin expansion. We expect VSF EBITDA at
~Rs13bn over FY11-13E.
• Star Cement update: The 3Q results included 0.75MT sales volume (~7% of
total cement volume) from STAR Cement in the quarter with realizations at
$55/MT with positive EBITDA but PAT loss of Rs270mn. GRASIM
highlighted that the acquisition is operating at ~80% capacity utilization
currently despite the ‘challenging environment in Middle East’.
• We remain OW with a revised March-12 PT of Rs2625 based on sum of the
parts. We value VSF business at a multiple of 5.5x and our cement valuations
are based on 20% holding company discount to our target valuations of UTCEM
(we value UTCEM on $130/MT). Key risk includes sharp collapse in VSF
demand and prices from current levels.
Valuation and key risks
Our revised PT of Rs2,625 is based on sum of the parts and roll forward our target
date to Mar-12. We value VSF business at a multiple of 5.5x and our cement
valuations are based on 20% holding company discount to our target valuations of
UTCEM (we value UTCEM on $130/MT).
The key risk remains the lack of visibility regarding the usage of VSF cash flows
(steady state EBITDA of ~Rs13bn), which historically were invested in the cement
business.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Grasim Industries Ltd
Overweight
GRAS.BO, GRASIM IN
Cost pressures emerging in VSF but demand, ASP outlook strong
• Operating results slightly ahead: Grasim’s 3QFY11 Consol EBITDA of
Rs12.0bn was slightly ahead of JPMe at Rs11.5bn and well above the consensus
at Rs10.6bn. Besides the inline 3QFY11 results reported by UTCEM and strong
performance from the VSF segment, the company’s JVs contributed Rs448MM
to the consol EBITDA during the quarter. Reported consol PAT was Rs5.0bn;
inline with our estimates of Rs4.9bn. Standalone tax rate of 27.8% was lower
than our expectation of 25%.
• VSF- demand and realizations strong, but increasing cost pressures: VSF
segment reported EBITDA at Rs3.9bn (-4% y/y, +42% q/q) with sales volumes
increasing 4% y/y and 25% q/q, while ASP increased by 12% y/y and 6% q/q.
However, EBITDA margins (standalone) declined y/y at 34.4% v/s 41.9% in
Q3FY10. GRASIM highlighted the cost pressures across the chain with pulp
costs +35%, sulfur costs +119%, and energy costs +17%. On a consolidated
VSF segment including the pulp JV, EBITDA was up 2% y/y.
• VSF- Demand and ASP outlook remains strong: We agree with
management’s expectations of continued strength in the VSF segment. Demand
outlook remains robust with the textile sector recovering. Importantly,
continued elevated cotton prices are a strong positive for VSF prices, given that
VSF is a substitute for cotton. Increasing spot pulp prices is also positive for
VSF prices, as it pushes up the cost curve for VSF in China. However, cost
pressures are likely to limit margin expansion. We expect VSF EBITDA at
~Rs13bn over FY11-13E.
• Star Cement update: The 3Q results included 0.75MT sales volume (~7% of
total cement volume) from STAR Cement in the quarter with realizations at
$55/MT with positive EBITDA but PAT loss of Rs270mn. GRASIM
highlighted that the acquisition is operating at ~80% capacity utilization
currently despite the ‘challenging environment in Middle East’.
• We remain OW with a revised March-12 PT of Rs2625 based on sum of the
parts. We value VSF business at a multiple of 5.5x and our cement valuations
are based on 20% holding company discount to our target valuations of UTCEM
(we value UTCEM on $130/MT). Key risk includes sharp collapse in VSF
demand and prices from current levels.
Valuation and key risks
Our revised PT of Rs2,625 is based on sum of the parts and roll forward our target
date to Mar-12. We value VSF business at a multiple of 5.5x and our cement
valuations are based on 20% holding company discount to our target valuations of
UTCEM (we value UTCEM on $130/MT).
The key risk remains the lack of visibility regarding the usage of VSF cash flows
(steady state EBITDA of ~Rs13bn), which historically were invested in the cement
business.
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