Grasim Industries Cheap but will feel headwinds ::Macquarie Research

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Grasim Industries
Cheap but will feel headwinds
Event
 Downgrade to Neutral: We believe Grasim will feel the headwinds of
stagnating earnings and potential penalty by the Competition Commission of
India on its subsidiary Ultratech. However, the stock does not look expensive
to us and offers diversified earnings given the conglomerate structure. Thus,
we downgrade Grasim to Neutral from Outperform. We marginally reduce our
earnings estimates (3–5%) and cut our TP to Rs2,757 (from Rs2,851).
Impact
 Cement – our assumptions remain optimistic: We build in 11% YoY
volume growth for CY12 as well as flat EBITDA/t of Rs973. This is based on
the assumption that the current pricing discipline in the industry will continue,
despite the severely oversupplied market.
 Penalty by Competition Commission could erase 27% of net profit: We
believe that CCI is in the last stages of completing its enquiry into the cement
companies and likely to announce penalties in the next month or so. Based on
recent trends, this is likely to be 6-7% of total revenue or around 27% of net
profit.
 Bearish cotton outlook to weigh on Viscose Staple Fibre (VSF) prices:
Our global soft commodities team forecasts that fundamentals will continue to
loosen for cotton as world supply improves after last year’s bumper harvests
and as demand continues to weaken on the back of poor retail demand,
destocking and switching to synthetics. There is some short-term price
support from the US plantings and Chinese reserve buying, which may give
way to bearish fundamentals, especially on the demand side.
 Consensus numbers slightly bullish: We are 3% and 4% lower than
consensus on FY13E and FY14E, respectively, given our more muted view of
the VSF business outlook.
Earnings and target price revision
 We reduce our FY13E and FY14E earnings by 3% and 5%, respectively.
Price catalyst
 12-month price target: Rs2,757.00 based on a DCF methodology.
 Catalyst: Penalty by CCI and possible cement price drops post June.
Action and recommendation
 Downgrade to Neutral: In our view, investors who are not concerned about
CCI penalties may want to own this name as opposed to its subsidiary,
Ultratech Cements (UTCEM IN, Rs1,490.65, Underperform, TP: Rs883).