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Grasim: Good show…
Jan 23, 2008

Performance summary
  • Topline grew by 19% YoY during 3QFY08, propelled by core businesses of cement and VSF.
  • Operating profits grew 24% YoY, led by lower growth in operating costs.

  • Owing to improved cash flows, the company has lowered its debt burden, which is reflected by lower interest outgo.

  • This coupled with higher other income (40% YoY growth) boosted net profits by 29% YoY in 3QFY08.

  • On a standalone basis in 3QFY08, the topline and the bottomline has witnessed a 15% YoY and 35% YoY growth respectively and the same in 9mFY08, have grown by 23% and 47% YoY respectively.

  • Ultratech, subsidiary of the company, has fared well during the quarter with topline growing by 10% YoY and robust 32% YoY growth in bottomline.

  • During the quarter, the company has entered into an agreement for sale of its entire holdings of 53.63% in Shree Digvijay Cement Co. Ltd, a subsidiary company, at a price of Rs 42.5 per share subject to fulfillment of certain conditions.

Consolidated financial performance snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 36,681 43,583 18.8% 100,683 123,828 23.0%
Expenditure 25,505 29,776 16.7% 71,854 85,510 19.0%
Operating profit (EBITDA) 11,177 13,808 23.5% 28,829 38,318 32.9%
EBITDA margin 30.5% 31.7%   28.6% 30.9%  
Other income 649 905 39.5% 1,675 2,766 65.1%
Interest 545 510 -6.4% 1,628 1,618 -0.6%
Depreciation 1,546 1,662 7.5% 4,448 4,880 9.7%
Profit before tax/(loss) 9,735 12,541 28.8% 24,428 34,586 41.6%
Tax 3,038 3,994 31.5% 7,569 10,996 45.3%
Profit after tax/(loss) 6,697 8,546 27.6% 16,859 23,590 39.9%
Minority share (1,103) (1,310)   (2,769) (3,452)  
Share in profit / (loss) of associates - (18)   - (23)  
Net profit 5,593 7,219 29.1% 14,090 20,115 42.8%
Net margin 18.3% 19.6%   16.7% 19.1%  
No of shares (m)       92 92  
Diluted EPS (Rs)*         292.8  
P/E (times)         10.0  
*trailing twelve month earnings

What has driven performance in 3QFY08?
  • Growth across all the major divisions the company has led to 19% YoY and 23% YoY growth in topline during 3QFY08and 9mFY08 respectively.

  • The company’s performance has been enhanced mainly by its two core business segments, cement and VSF that reported 24% YoY and 16% YoY growth in revenues respectively in 3QFY08.

  • The production and sales of the VSF segment were higher by 3% and 2% year on year basis. This highlights the fact that the 16% YoY in revenue is more led by improved realisations than volumes.

  • There is huge demand for VSF globally (comfort fabrics and higher demand for knitted fabrics) which has led to firm prices. In order to cater to the growing demand for the commodity, the company has outlined capex plans (capacity expansion of Gujarat and Karnataka plant and greenfield plant at Gujarat) to the tune of Rs 14 bn over two to three years. The company has planned to foray into the consumer product segment with a test launch of non-woven products. Considering the demand for the commodity, leadership position and new initiatives, the segment would continue to be a cash cow for the company, going forward.

  • The same is the case with the cement division where growth again was more a factor of realisations than volumes. While the grey cement reported almost stagnant growth in volumes, white cement production and despatches were higher by 15% and 11% during 3QFY08 as compared to 3QFY07. Despite firm prices, the cement division PBIT margins at 14% were tad lower compared to 15% in 3QFY07, as higher realisations were offset by steep hike in fuel cost and increased freight charges.

    Particulars 3QFY07 3QFY08 9mFY07 9mFY08
    Cement (% of Total sales) 69.8% 68.0% 70.4% 67.7%
    VSF (% of Total sales) 20.1% 20.9% 19.2% 21.3%
    Chemicals (% of Total sales) 2.1% 2.7% 2.2% 2.6%
    Sponge Iron (% of Total sales) 5.3% 5.6% 5.1% 5.5%
    Textiles 1.6% 1.7% 2.0% 1.8%
    Others 2.4% 2.5% 2.3% 2.5%

  • The chemical division and the sponge iron business, considered weak links historically, have shown a marked improvement in performance in 3QFY08.

  • The chemical division of the company achieved 70% YoY growth in sales volumes owing to higher production (grew by 68% YoY). During the corresponding quarter, production was lower owing to the shut down of a captive power plant. Though the operational issues have been solved, owing to demand supply mismatch realisations are expected to remain under pressure.

  • The sponge iron business reported 22% YoY growth in production numbers, while sales volumes declined by 8% YoY. Still the earnings before interest and tax of the division more than doubled during 3QFY08 owing to improved realisations. The fate of the division is linked to steel industry, which has witnessed recovery recently and is expected to follow economic growth pattern. Going forward, availability of gas and uncertainty in its pricing remains a concern.

What to expect?
The stock currently trades at Rs 2,940, implying a price to earnings (P/E) multiple of 19.7 times our FY10E consolidated earnings. Considering the fact that the company is the only player in VSF business domestically and the outlook of VSF (from a long term point of view) and the cement sector for the medium term remaining positive, we believe that these two divisions will continue to drive the top line growth in medium term. However, the discomforting areas remain the sponge iron business, which could prove to be a drag on the company and softening of cement prices once the announced capacities come onstream. Considering these factors from a long-term standpoint, the stock appears fairly valued at the current juncture.

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