Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
A run of negative news has hit Grasim's stock price. But reports of weak VSF and cement prices
are largely in line with market expectations. We lower our EPS estimates by 1.5-6.5% to reflect
weaker volumes. The stock remains cheap, in our view, trading at 8.1x FY13F PER and 1x PB
Negative news flow has pushed stock down 11% over past two weeks
Grasim’s shares have fallen in the past few weeks on the back of: 1) the 3 June closure of its
viscose staple fibre (VSF) plant at Nagda, Madhya Pradesh; 2) media reports that the competition
commission is investigating cement and fibre industry pricing; and 3) VSF and cement price
declines. Closure of the Nagda plant (46% of Grasim’s total VSF capacity) is an annual
phenomenon ahead of the monsoons. In FY11, the plant was closed for 45 days, but since the
FY12 monsoon began on time, we expect the shutdown to be shorter this year. Meanwhile, the
market already expected the recent 10% VSF price correction following a sharp price rise in
2HFY11 and our cement earnings forecasts already reflect weak margin for UltraTech Cement
(60.3% owned).
VSF constrained by capacity in the near term, but 47% capacity expansion expected
Grasim’s VSF business has generated average annual EBITDA of Rs51.24bn over the last five
years – it remains a high-ROCE business (55.96% in FY11) and highly free cash flow generative.
The company currently has 333,975mt of VSF capacity, but, as it is operating at near-peak
utilisation (adjusting for shutdowns), it has Rs33.5bn worth of capex planned to raise capacity
47% over the next two years. We factor in a 3% VSF volume CAGR and declining margins over
FY12-13 to yield flat EBITDA at around the FY11 level through FY13.
Maintain Buy as growth drivers in place
Grasim’s cement business operates at 77% utilisation and is on track to raise capacity 20% by
FY14. Thus, we see good scope for volume growth over the next three to four years. While we
are cautious on cement margins for next two years, at its current valuation we believe the stock
offers a good entry point for long-term investors. We lower our SOTP-based target price to
Rs2,354.5 to reflect our lower earnings outlook and lower prices for its investments in group
companies.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
A run of negative news has hit Grasim's stock price. But reports of weak VSF and cement prices
are largely in line with market expectations. We lower our EPS estimates by 1.5-6.5% to reflect
weaker volumes. The stock remains cheap, in our view, trading at 8.1x FY13F PER and 1x PB
Negative news flow has pushed stock down 11% over past two weeks
Grasim’s shares have fallen in the past few weeks on the back of: 1) the 3 June closure of its
viscose staple fibre (VSF) plant at Nagda, Madhya Pradesh; 2) media reports that the competition
commission is investigating cement and fibre industry pricing; and 3) VSF and cement price
declines. Closure of the Nagda plant (46% of Grasim’s total VSF capacity) is an annual
phenomenon ahead of the monsoons. In FY11, the plant was closed for 45 days, but since the
FY12 monsoon began on time, we expect the shutdown to be shorter this year. Meanwhile, the
market already expected the recent 10% VSF price correction following a sharp price rise in
2HFY11 and our cement earnings forecasts already reflect weak margin for UltraTech Cement
(60.3% owned).
VSF constrained by capacity in the near term, but 47% capacity expansion expected
Grasim’s VSF business has generated average annual EBITDA of Rs51.24bn over the last five
years – it remains a high-ROCE business (55.96% in FY11) and highly free cash flow generative.
The company currently has 333,975mt of VSF capacity, but, as it is operating at near-peak
utilisation (adjusting for shutdowns), it has Rs33.5bn worth of capex planned to raise capacity
47% over the next two years. We factor in a 3% VSF volume CAGR and declining margins over
FY12-13 to yield flat EBITDA at around the FY11 level through FY13.
Maintain Buy as growth drivers in place
Grasim’s cement business operates at 77% utilisation and is on track to raise capacity 20% by
FY14. Thus, we see good scope for volume growth over the next three to four years. While we
are cautious on cement margins for next two years, at its current valuation we believe the stock
offers a good entry point for long-term investors. We lower our SOTP-based target price to
Rs2,354.5 to reflect our lower earnings outlook and lower prices for its investments in group
companies.
No comments:
Post a Comment