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UBS Investment Research
Grasim Industries
O ur top pick in the sector [EXTRACT]
Recovery expected in the VSF business
Although viscose staple fibre (VSF) volumes were weak in Q1 FY12, Grasim
Industries (Grasim) attributes this to falling prices, which led to destocking, rather
than to a sharp decline in demand. The company expects VSF volumes to grow in
FY12 YoY as plant shutdowns this year will be for shorter durations than last year.
Demand appears to have normalised and Grasim also expects pricing to stabilise in
China. We assume a 1% volume increase in FY12 and 3% in FY13.
VSF margins were impacted by rise in energy and caustic soda prices
Energy and caustic soda comprise 15-20% of Grasim’s total costs. Pulp spot prices
have declined more than 45% since April. However, Grasim has long-term
contracts that are lower than spot prices. It also sources about 80% of its
requirements through captive facilities. Grasim’s VSF EBITDA margin was 28%
in Q1 FY12. We lower our full-year margin estimate to 26% (to factor in potential
downside due to VSF pricing volatility) and think our assumptions could be
conservative.
Lowering earnings estimates for FY12/FY13
We lower our FY12/FY13 EPS estimates from Rs251.54/Rs304.73 to
Rs244.76/Rs275.62, led by our lower margin assumption for VSF, which is partly
offset by our higher earnings estimates for UltraTech.
Valuation: Buy rating with SOTP-based price target of Rs2,600
We lower our price target from Rs2,930 to Rs2,600, primarily due to our revised
price target for UltraTech and our lower VSF margin assumptions. We value: 1)
the cement business at our price target of Rs950 for UltraTech and apply a 20%
holding company discount; 2) the VSF business at 5x EV/EBITDA (FY13E); and
3) other businesses at 4.5x EV/EBITDA (FY13E)
Grasim Industries
Grasim is the holding company (60.3% stake) of Ultratech, India's largest
cement company with a total capacity of about 52mt. It is also India's largest
manufacturer of viscose staple fibre (VSF) and has a 10% global market share. It
also has interests in chemicals and textiles.
Statement of Risk
We believe the key risk to our outlook for the sector could come from an
unexpected fall in cement prices, increase in input costs, such as coal/freight,
and any government intervention to lower cement prices.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Grasim Industries
O ur top pick in the sector [EXTRACT]
Recovery expected in the VSF business
Although viscose staple fibre (VSF) volumes were weak in Q1 FY12, Grasim
Industries (Grasim) attributes this to falling prices, which led to destocking, rather
than to a sharp decline in demand. The company expects VSF volumes to grow in
FY12 YoY as plant shutdowns this year will be for shorter durations than last year.
Demand appears to have normalised and Grasim also expects pricing to stabilise in
China. We assume a 1% volume increase in FY12 and 3% in FY13.
VSF margins were impacted by rise in energy and caustic soda prices
Energy and caustic soda comprise 15-20% of Grasim’s total costs. Pulp spot prices
have declined more than 45% since April. However, Grasim has long-term
contracts that are lower than spot prices. It also sources about 80% of its
requirements through captive facilities. Grasim’s VSF EBITDA margin was 28%
in Q1 FY12. We lower our full-year margin estimate to 26% (to factor in potential
downside due to VSF pricing volatility) and think our assumptions could be
conservative.
Lowering earnings estimates for FY12/FY13
We lower our FY12/FY13 EPS estimates from Rs251.54/Rs304.73 to
Rs244.76/Rs275.62, led by our lower margin assumption for VSF, which is partly
offset by our higher earnings estimates for UltraTech.
Valuation: Buy rating with SOTP-based price target of Rs2,600
We lower our price target from Rs2,930 to Rs2,600, primarily due to our revised
price target for UltraTech and our lower VSF margin assumptions. We value: 1)
the cement business at our price target of Rs950 for UltraTech and apply a 20%
holding company discount; 2) the VSF business at 5x EV/EBITDA (FY13E); and
3) other businesses at 4.5x EV/EBITDA (FY13E)
Grasim Industries
Grasim is the holding company (60.3% stake) of Ultratech, India's largest
cement company with a total capacity of about 52mt. It is also India's largest
manufacturer of viscose staple fibre (VSF) and has a 10% global market share. It
also has interests in chemicals and textiles.
Statement of Risk
We believe the key risk to our outlook for the sector could come from an
unexpected fall in cement prices, increase in input costs, such as coal/freight,
and any government intervention to lower cement prices.
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