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Grasim: VSF affected due to Eurozone crisis - Views on News from Equitymaster
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Grasim: VSF affected due to Eurozone crisis
Jan 25, 2012

Grasim Industries has announced its financial results for the quarter and nine month period ended December 2011. The company has reported a rise of 2% YoY in standalone sales and a decline of 3% YoY in net profits for the quarter ended December 2011. Here is our analysis of the results:

Performance summary
  • Standalone revenues increase by 2% YoY during 3QFY12 on account of year-on-year decline in VSF sales volume.
  • Operating margins decline from 29.9% in 3QFY11 to 22.7% in 3QFY12 on account of high input costs.
  • At the bottomline level, net profits decrease by 3% YoY on account of poor show at the operating level. Net margins decline from 23.3% in 3QFY11 to 22.2% in 3QFY12.
  • During 9MFY12, sales and profits grow by 12% YoY and 19% YoY respectively.

Standalone Financial Performance
(Rs m) 3QFY11 3QFY12 Change 9MFY11 9MFY12 Change
Net sales 12,137 12,381 2.0% 30,912 34,650 12.1%
Expenditure 8,502 9,575 12.6% 21,628 25,409 17.5%
Operating profit (EBITDA) 3,635 2,807 -22.8% 9,284 9,240 -0.5%
EBITDA margin 29.9% 22.7%   30.0% 26.7%  
Other income 842 1,140 35.4% 3,058 4,307 40.9%
Interest 117 72 -39.0% 323 284 -11.8%
Depreciation 442 366 -17.3% 1,340 1,073 -20.0%
Profit before tax/(loss) 3,917 3,509 -10.4% 10,679 12,190 14.2%
Tax 1,089 765 -29.8% 2,817 2,856 1.4%
Profit after tax/(loss) 2,827 2,745 -2.9% 7,862 9,335 18.7%
Net margin 23.3% 22.2%   25.4% 26.9%  
No of shares (m)       91.7 91.7  
Diluted EPS (Rs)*         144.9  
P/E (times)*         17.1  
*trailing twelve month earnings

What has driven performance in 3QFY12?
  • Grasim's standalone topline grew by 2% YoY during the quarter ended December 2011 on the back of 8% YoY decline in sales volumes. On the other hand, despite a drop in international VSF prices, average realisations during the quarter were higher by 4% YoY due to depreciation in the value of the rupee. Operating costs were high during the period as cost of raw materials and power & fuel surged by 400 basis points (4%) and 300 basis points (3%) as a percentage of net sales. Owing to this, operating margins declined from 29.9% in 3QFY11 to 22.7% in 3QFY12.

  • Other income was higher by 35.4% YoY during the quarter. Interest expenses declined by 39% YoY on account of interest subsidy from state government of Rajasthan. Depreciation charges dropped by 17.3% YoY during the quarter. The effective tax rate was also lower by 600 basis points (6%) during 3QFY12.

  • Non-operating items helped in offsetting the poor operating performance to a certain extent. As a result, net profit margins dropped only marginally by 2.9% YoY. Net profit margins declined from 23.3% in 3QFY11 to 22.2% in 3QFY12.

  • The company’s expansion plans are progressing as per schedule. VSF capacity is set to increase by 50% to 490,000 tonnes per annum (TPA) by the end of financial year 2012-13 (FY13). In addition, Grasim is also planning to set up a greenfield VSF project of 180,000 TPA in Turkey through a joint venture with Group companies. The necessary land for the same has been acquired.

What to expect?
Owing to factors such as the Eurozone crisis and the overall slowdown in the domestic economy adversely affected demand for VSF. This in turn put downward pressure on VSF prices. Though the rupee depreciation helped Grasim offset the drop in realisations, it also increased the imported cost of raw materials. Cotton prices have also witnessed a decline. In the near to medium term, the uncertainty in the global economy could have a bearing on the prospects of VSF. However, Grasim is a well-integrated player in the VSF market, commanding a leadership position.

At the current price of about Rs 2,483 the stock is trading at 17.1 times trailing 12 month earnings. We maintain our "Buy" view on the stock from a 2-3 years perspective.

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