Grasim Industries - UTCEM beat and strong VSF margin drive another robust quarter ::JPMorgan,

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Grasim Industries Ltd
Overweight
GRAS.BO, GRASIM IN
UTCEM beat and strong VSF margin drive another
robust quarter


While we had expected a strong set of results from Grasim post the  large
earnings beat by UTCEM (EBITDA ~20% ahead of JPMe) last week (link
to the  report), the  company  continues its  strong  performance in the  VSF
segment.  We  were  surprised  by  the  margin  performance  of  the  business
(flat  q/q  at  39%)  despite  a weak  pricing  environment  and  continued  cost
pressures.  Consol  EBITDA  was  at  Rs16.4bn  (vs.  JPMe  Rs13.6bn  and
consensus  at  Rs13.0bn)  and  consol  PAT  was  at  Rs7.5bn  (vs.  JPMe
Rs6.5bn and consensus at Rs5.8bn).
 Better  than  expected  realizations  in  a  weak  environment:  Grasim’s
VSF  segment  reported EBITDA  of Rs3.5bn  (vs.  JPMe Rs3.2bn) driven
by  5%  increase  in  realization  (Rs152/kg-lifetime  high  realizations)  and
lower  than  expected  cost. The  strong  ASPs  was  a  results  of  higher
average prices (volumes in Jun were lower due to plant shutdown) given
the  high  exit  prices  in  4QFY11  (Rs158/kg),  which  helped despite  the
~Rs12/kg  price  reduction  in  the  quarter.  Further,  lower  than  expected
cost increase (+4% q/q) aided to maintain flat VSF margins q/q (~39%).
1QFY12 volumes were down 36% q/q and -19% y/y (54.8kt vs. JPMe at
63kt)  due  to  weak  demand  (high  inventory in  the  value  chain)  and
disruption  in  production  at  Nagda  in  June owing  to  water  shortage
(restarted from 30-Jun-11).  
 2QFY12 to  see  a  slowdown  in  performance:  The  VSF  segment
margins would see an impact from lower prices (exit prices at Rs141/kg
and  reduced  further  in  July)  from  2QFY12  onwards.  Further,
management  has  highlighted  in  its  presentation  that  "slackness  in
demand" would impact 2Q volumes and  expect to  see gradual  recovery
thereafter. We expect VSF margins at 32% level over FY12-13. 1QFY12
VSF  EBITDA  of  Rs3.5bn  was  27%  of  JPMe  FY12  VSF  EBITDA
(Rs13.2bn).
 Cement  sector  outlook:  As  against  its previous  guidance  of  cement
industry demand growth of >8.5% in FY12, the management now expect
demand growth of >7.5% from 2HFY12 onwards. This coupled with the
weak  growth  in  1QFY12  (demand  grew  at  1.4%) and  the  monsoon
impact in the  Sep quarter, we believe that our  estimate  for 7% industry
consumption growth  in  FY12  remains at  risk.  The  management,  in  its
presentation,  pointed  to  a  weak  price  environment  in  the  monsoon  and
highlighted  that  demand  and  prices  from  3QFY12 would  depend  on
‘construction activities post monsoon and general revival of economy’.
 Marginal reduction in capex guidance: As highlighted in our previous
note (link to the report) on cement capex, the management reduced capex
guidance  for  cement from  Rs53.67bn  to  Rs51.4bn  in  FY12  (and  was
pushed up in FY13). 1QFY12 capex in cement was at Rs5.92bn.