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UBS Investment Research
Grasim Industries
K ey takeaways from the conference call
Recovery expected in VSF business
Volumes in the VSF business were weak primarily due to destocking (led by
falling prices). Grasim’s volumes are expected to grow in FY12 on a YoY basis as
plant shutdown this year will be for a lesser duration compared to last year.
Demand seems to have normalized and pricing is also expected to stabilize now in
China. Current VSF realizations are about Rs120-125/kg (~Rs152/kg in Q1FY12;
~Rs116/kg in Q2FY11; ~Rs127/kg in FY11).
Expects cement demand to pick-up in H2; will grow in-line with industry
Though industry dispatches have been flat in Q1, Grasim expects demand growth
to be 7.5%+ from 2H FY12 onwards, driven by higher infrastructure spending and
rural demand (driven by good agricultural growth). Ultratech volumes are expected
to grow in-line with the industry. Grasim thinks 80-90mt of capacity could be
added in the cement industry over the next five years. The company is ready to
participate in in-organic growth opportunities but consolidation in the industry is
not happening due to difference in price expectations of sellers and buyers.
Company targets 16-18% equity IRRs for its capex investments
Capacity expansion projects are on track and capex is expected to pick-up in
Q3/Q4 of this year. Current cost of linkage coal is ~Rs3,500/t and e-auction is
Rs600-800/t higher. Imported coal costs US$141/t currently. Company expects
both domestic and imported coal prices to have stabilized.
Valuation: Buy rating
We maintain our Buy rating with SOTP-based PT of Rs2,930.
Key highlights from the conference call
VSF Prices: Prices corrected during later part of Q1. VSF prices are expected to
stabilize in China as cotton prices also seem to have stabilized. VSF realizations
are currently at Rs120-125/kg versus Rs152/kg in Q1.
VSF volumes: Demand seems to have normalized now. There was no collapse
of demand and it was just that falling prices led to destocking. Volumes
expected to improve in FY12 over FY11 for Grasim as the plant shutdown has
been for a shorter duration in FY12 (in FY11 the plant shutdown was for
55days). Grasim currently has an inventory of about 15,000tons that will be
reduced in this quarter.
VSF EBITDA: VSF EBITDA/t was affected due to increase in energy and
caustic soda prices (15-20% of total costs).
Pulp prices: Spot prices have declined- currently are at US$1,400/t versus
US$2,600/t in Apr-11. Long term contract price stood at US$1,100/t. Grasim
has captive sources for ~80% of its requirements and it sources the balance 20%
through long-term contracts.
Cement Prices: Declined by Rs8-10 per bag on an average in this quarter so far.
There is no sharp variation across regions in this decline.
Cement volumes: Growth for Ultratech to be in-line with the industry.
Industry capacity additions: The company thinks 80-90mt of capacity could
be added over the next five years.
Consolidation: Consolidation not happening due to mismatch between price
expectation of buyer and seller. Grasim is ready to participate in inorganic
growth opportunities.
Capex: Total capex of Rs144bn (target IRR of 16-18%; target D/E of 1:1) with
Rs34bn in the standalone entity and Rs110bn earmarked for cement (Rs51.4bn
in FY12 and the balance Rs58.6bn in 15 months after that) Grasim has spent
Rs8bn in Q1- Rs2bn in the standalone entity and Rs6bn in cement. Spending
will increase significantly in Q3 and Q4 of this year.
Coal pricing: Current cost of linkage coal is ~Rs3,500/t and of e-auction coal is
Rs4100/t-4300/t. The purchase price of imported coal currently is about
US$141/t on an average. The company predominantly uses E and F grade coal
wherein the domestic linkage price increase has been 30% (full impact of this
increase was not felt in the entire quarter). Expects coal prices (both linkage and
imported coal) to stabilize at current levels.
Coal usage: Cost optimization achieved through change in fuel mix, helped by
lower capacity utilization. The fuel mix improved as follows: Domestic coal
(linkage + e-auction) from 36% to 43%, imported Coal from 52% to 38% and
pet coke from 12% to 18%. Will see reversal of this change as utilization levels
improve.
Rail/Road ratio for cement in Q1: 60% Road, 36% Railways and 4% sea
route. In order to reduce dependency on railways and the associated volume loss
and also to reduce the freight cost, the company has planned its logistics
investments including setting-up terminals in key consuming markets. Benefits
from the same will be visible after 15-20 months time.
Captive Power for Cement: Additional 215MW planned- 1) 95MW with
expansion projects, 2) for existing projects, 45MW of waste heat plant and
75MW of thermal power plant (expected to commission in FY13).
Star Cement: Sales volume of 0.66mt in Q1 (capacity utilization of above 90%)
with realization of US$42-53/t. Demand in UAE was weak and declined by 13%
though Star’s market share improved to 14.3% in Q1 from 12.8%. Realizations
remain an area of concern. The company broke even at the EBITDA level in the
quarter.
White cement: volumes declined due to plant shutdown and there was no
visible decline in demand.
Depreciation: Was lower in the quarter due to sale of aircraft in Q4.
Tax rate: Has been lower due to income from investments in mutual funds
(Grasim has surplus funds).
Domsjo: PAT of Rs1.73bn in Q1
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 comes from a significant decline in cement prices,
delays in its capacity additions, rise in input costs (mainly coal/freight) and any
government intervention to lower cement prices. Grasim imports close to 33%
of its requirements so any significant increase in imported coal prices are likely
to be negative for the company. The proposed restructuring plan needs to be
approved by various regulatory authorities.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Grasim Industries
K ey takeaways from the conference call
Recovery expected in VSF business
Volumes in the VSF business were weak primarily due to destocking (led by
falling prices). Grasim’s volumes are expected to grow in FY12 on a YoY basis as
plant shutdown this year will be for a lesser duration compared to last year.
Demand seems to have normalized and pricing is also expected to stabilize now in
China. Current VSF realizations are about Rs120-125/kg (~Rs152/kg in Q1FY12;
~Rs116/kg in Q2FY11; ~Rs127/kg in FY11).
Expects cement demand to pick-up in H2; will grow in-line with industry
Though industry dispatches have been flat in Q1, Grasim expects demand growth
to be 7.5%+ from 2H FY12 onwards, driven by higher infrastructure spending and
rural demand (driven by good agricultural growth). Ultratech volumes are expected
to grow in-line with the industry. Grasim thinks 80-90mt of capacity could be
added in the cement industry over the next five years. The company is ready to
participate in in-organic growth opportunities but consolidation in the industry is
not happening due to difference in price expectations of sellers and buyers.
Company targets 16-18% equity IRRs for its capex investments
Capacity expansion projects are on track and capex is expected to pick-up in
Q3/Q4 of this year. Current cost of linkage coal is ~Rs3,500/t and e-auction is
Rs600-800/t higher. Imported coal costs US$141/t currently. Company expects
both domestic and imported coal prices to have stabilized.
Valuation: Buy rating
We maintain our Buy rating with SOTP-based PT of Rs2,930.
Key highlights from the conference call
VSF Prices: Prices corrected during later part of Q1. VSF prices are expected to
stabilize in China as cotton prices also seem to have stabilized. VSF realizations
are currently at Rs120-125/kg versus Rs152/kg in Q1.
VSF volumes: Demand seems to have normalized now. There was no collapse
of demand and it was just that falling prices led to destocking. Volumes
expected to improve in FY12 over FY11 for Grasim as the plant shutdown has
been for a shorter duration in FY12 (in FY11 the plant shutdown was for
55days). Grasim currently has an inventory of about 15,000tons that will be
reduced in this quarter.
VSF EBITDA: VSF EBITDA/t was affected due to increase in energy and
caustic soda prices (15-20% of total costs).
Pulp prices: Spot prices have declined- currently are at US$1,400/t versus
US$2,600/t in Apr-11. Long term contract price stood at US$1,100/t. Grasim
has captive sources for ~80% of its requirements and it sources the balance 20%
through long-term contracts.
Cement Prices: Declined by Rs8-10 per bag on an average in this quarter so far.
There is no sharp variation across regions in this decline.
Cement volumes: Growth for Ultratech to be in-line with the industry.
Industry capacity additions: The company thinks 80-90mt of capacity could
be added over the next five years.
Consolidation: Consolidation not happening due to mismatch between price
expectation of buyer and seller. Grasim is ready to participate in inorganic
growth opportunities.
Capex: Total capex of Rs144bn (target IRR of 16-18%; target D/E of 1:1) with
Rs34bn in the standalone entity and Rs110bn earmarked for cement (Rs51.4bn
in FY12 and the balance Rs58.6bn in 15 months after that) Grasim has spent
Rs8bn in Q1- Rs2bn in the standalone entity and Rs6bn in cement. Spending
will increase significantly in Q3 and Q4 of this year.
Coal pricing: Current cost of linkage coal is ~Rs3,500/t and of e-auction coal is
Rs4100/t-4300/t. The purchase price of imported coal currently is about
US$141/t on an average. The company predominantly uses E and F grade coal
wherein the domestic linkage price increase has been 30% (full impact of this
increase was not felt in the entire quarter). Expects coal prices (both linkage and
imported coal) to stabilize at current levels.
Coal usage: Cost optimization achieved through change in fuel mix, helped by
lower capacity utilization. The fuel mix improved as follows: Domestic coal
(linkage + e-auction) from 36% to 43%, imported Coal from 52% to 38% and
pet coke from 12% to 18%. Will see reversal of this change as utilization levels
improve.
Rail/Road ratio for cement in Q1: 60% Road, 36% Railways and 4% sea
route. In order to reduce dependency on railways and the associated volume loss
and also to reduce the freight cost, the company has planned its logistics
investments including setting-up terminals in key consuming markets. Benefits
from the same will be visible after 15-20 months time.
Captive Power for Cement: Additional 215MW planned- 1) 95MW with
expansion projects, 2) for existing projects, 45MW of waste heat plant and
75MW of thermal power plant (expected to commission in FY13).
Star Cement: Sales volume of 0.66mt in Q1 (capacity utilization of above 90%)
with realization of US$42-53/t. Demand in UAE was weak and declined by 13%
though Star’s market share improved to 14.3% in Q1 from 12.8%. Realizations
remain an area of concern. The company broke even at the EBITDA level in the
quarter.
White cement: volumes declined due to plant shutdown and there was no
visible decline in demand.
Depreciation: Was lower in the quarter due to sale of aircraft in Q4.
Tax rate: Has been lower due to income from investments in mutual funds
(Grasim has surplus funds).
Domsjo: PAT of Rs1.73bn in Q1
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 comes from a significant decline in cement prices,
delays in its capacity additions, rise in input costs (mainly coal/freight) and any
government intervention to lower cement prices. Grasim imports close to 33%
of its requirements so any significant increase in imported coal prices are likely
to be negative for the company. The proposed restructuring plan needs to be
approved by various regulatory authorities.
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