VSF remains depressed Grasim Industries :: HDFC Sec, report

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VSF remains depressed Grasim Industries’ standalone numbers were inline (EBITDA Rs 1.81n vs. est 1.78bn). Volume growth plateaued (97kt, flat YoY) despite higher production (+15% YoY) due to issues in the supply chain (per mgmt). Grasim managed to hold on to pricing (Rs 124/kg, -3.7% YoY, -1.5% QoQ) despite pressure and reported moderation in VSF profitability (Rs 14/kg, -6.3% Qoq, -19.5% YoY). VSF outlook continues to remain muted at best, with volume holdback in 3Q highlighting the absence of demand domestically. In addition to weakness in cotton, PSF prices have also crashed, driven by sharply lower crude prices. As a result, pricing will remain under considerable pressure going ahead. However we maintain our positive stance, which is led by UltraTech holding company discount visible in Grasim stock price (~45% at CMP). Maintain BUY with a revised TP of Rs 4,898 (20% holding company discount for UltraTech)  3QFY15 highlights : Consolidated EBITDA was ahead of estimates driven by beat in cement business. Acquisition of JP Associates’ Gujarat capacities drove the YoY growth in consolidated EBITDA (+15.9% YoY), even as standalone business remained weak (-13.3% YoY). Grasim reported flattish profits due to higher interest and depreciation on account of JPA acquisition.  Outlook and view : We have revised our estimates downwards (EBITDA -10.2%/-6.0% for FY15/16), mainly on account of revision in UltraTech’s nos. In the cement business, overall sentiment remains broadly positive, but UltraTech’s valuation is now greatly stretched (15.2/11.5 FY15/16 EV/EBITDA). Despite pessimism in the parent VSF business, we believe Grasim is a better alternative compared to UltraTech at this juncture, given the holding company discount visible in UltraTech’s valuation (~45% at CMP).

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3011090