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Grasim's FY11 balance sheet shows a strong financial position despite its gross block doubling to
Rs241.6bn in the last five years. Grasim has zero net debt. Management sees the near-term
outlook for VSF and cement remaining challenging, but we believe the stock offers value at
current levels. Buy retained.
Grasim should maintain its global dominance in the VSF business
Grasim’s FY11 annual report reiterates the Birla group’s aggressive growth plans for the viscose
staple fibre (VSF) business. The group plans to raise its global VSF capacity from 744,000t
(Grasim accounts for 333975mt) to 1mt in the next three years. Grasim will add 156,000t in India
during this period at a cost of Rs24bn. Focusing on speciality products, Grasim has begun
producing ’micro modal’, a finer denier modal widely used in knitwear and women’s wear.
Grasim’s VSF business has tied up with leading textile manufacturers. The business has
generated a free cash of Rs66bn over the last 10 years, fuelling investments in the cement
business.
Management expects near-term sector headwinds
Management believes Grasim’s long-term outlook remains strong. However, it expects near-term
challenges to weigh on the performance of VSF and cement divisions. The demand-supply gap,
infrastructure bottlenecks and rising input costs remain key challenges for the cement division,
while cotton production and pricing of competitive fibre look set to impact the near-term
profitability of the VSF division. However, in the long run, management expects demand for
cement in India and global VSF to grow at 8.5% and 5-6%, respectively.
We maintain our Buy rating despite near-term earnings pressure
We forecast FY14 EPS at Rs267.8. Due to stronger-than-expected 1Q12 earnings, we raise our
FY12 EPS estimates by 5.4% but reduce our FY13 EPS estimates by 5.2% to reflect the pricing
weakness we expect in both the VSF and cement businesses. Our SOTP-based TP remains
largely unchanged at Rs2342.06 (from Rs2353.74). We continue to value Grasim’s 60.33% stake
in Ultratech at a 25% discount to our TP of Rs879 and its other investments in group companies
at a 40% discount. Any unlocking of these investments at market prices could provide upside to
our valuations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Grasim's FY11 balance sheet shows a strong financial position despite its gross block doubling to
Rs241.6bn in the last five years. Grasim has zero net debt. Management sees the near-term
outlook for VSF and cement remaining challenging, but we believe the stock offers value at
current levels. Buy retained.
Grasim should maintain its global dominance in the VSF business
Grasim’s FY11 annual report reiterates the Birla group’s aggressive growth plans for the viscose
staple fibre (VSF) business. The group plans to raise its global VSF capacity from 744,000t
(Grasim accounts for 333975mt) to 1mt in the next three years. Grasim will add 156,000t in India
during this period at a cost of Rs24bn. Focusing on speciality products, Grasim has begun
producing ’micro modal’, a finer denier modal widely used in knitwear and women’s wear.
Grasim’s VSF business has tied up with leading textile manufacturers. The business has
generated a free cash of Rs66bn over the last 10 years, fuelling investments in the cement
business.
Management expects near-term sector headwinds
Management believes Grasim’s long-term outlook remains strong. However, it expects near-term
challenges to weigh on the performance of VSF and cement divisions. The demand-supply gap,
infrastructure bottlenecks and rising input costs remain key challenges for the cement division,
while cotton production and pricing of competitive fibre look set to impact the near-term
profitability of the VSF division. However, in the long run, management expects demand for
cement in India and global VSF to grow at 8.5% and 5-6%, respectively.
We maintain our Buy rating despite near-term earnings pressure
We forecast FY14 EPS at Rs267.8. Due to stronger-than-expected 1Q12 earnings, we raise our
FY12 EPS estimates by 5.4% but reduce our FY13 EPS estimates by 5.2% to reflect the pricing
weakness we expect in both the VSF and cement businesses. Our SOTP-based TP remains
largely unchanged at Rs2342.06 (from Rs2353.74). We continue to value Grasim’s 60.33% stake
in Ultratech at a 25% discount to our TP of Rs879 and its other investments in group companies
at a 40% discount. Any unlocking of these investments at market prices could provide upside to
our valuations.
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