Grasim Industries has reported a 5% drop in sales and a 30 basis points fall in operating margins for the third quarter ended December 31, 2001. This is primarily on account of weak performance of some of its division like Viscose Staple Fibre (VSF) and sponge iron. Capacity additions by some of the large players like Gujarat Ambuja and the resultant rise in regional supplies have subdued performance of its cement division as well.
Operating Profit (EBDIT)
Operating Profit Margin (%)
Profit before Tax
Profit after Tax/(Loss)
Net profit margin (%)
No. of Shares (m)
Diluted Earnings per share*
P/E Ratio (x)
Though operating margin for its VSF division has increased from 28% in 3QFY01 to 30% in 3QFY02 on account of a 16% fall in pulp prices, demand continues to remain sluggish. While production of VSF has declined by 14%, average realisation is also lower by 4%. The company's measures to improve exports have resulted in a 33% growth in deemed exports sequentially. However, it is lower by around 7% YoY, which could be attributed to the slowdown in the global economy. In the second quarter of the current fiscal, Grasim closed its pulp & fibre plants in Mavoor. This has enabled the company to augment operating profits of its fibre division.
The cement division has reported a 9% growth in cement sales as against the industry growth of 12%. Towards availing sales tax benefits, most of the cement majors have increased cement capacity in the first nine months. This has resulted in higher regional supplies notably in Western and Northern region. While Grasim's cement sales increased by 22% in the Northern region, it is 9%, 1% and 7% in Eastern, Southern and Western markets respectively. In line with expectations, realisations have gone up in the Northern markets whereas it has declined by 7% in the Southern region. Grasim has commenced commercial production at its 1 million ton per annum (MTPA) cement grinding plant at Bhatinda, Punjab in 3QFY02.
But there are some grey areas for the company as well. The textiles division of the company continues to suffer from sluggish market conditions. Fabrics, which contributed to around 65% of the company's sales, has been facing intense competition from imports. Higher competition and subdued prices have exercised downward pressure on operating margins. Similarly, average realisation of sponge iron has declined by 5% in 3QFY02 thus dragging turnover down by 23%. Though Grasim has managed to increase operating margins of its sponge division marginally, the slowdown in both the domestic as well as global economy are a cause of concern.
Extraordinary item in 3QFY02 here pertains towards the following items: Loss on closure of its fibre plant at Mavoor Rs 369 m, employee separation costs to the tune of Rs 31 m and Rs 181 m towards excess provision for income tax pertaining to earlier years' written back. This also includes the loss on sale of Grasim's entire shareholding in Birla Technologies at Rs 11.5 per share to PSI Datasystems, a subsidiary of Indian Rayon, another Aditya Birla Group Company.
Going forward, the cement division is expected to be the key growth driver of the company. Thanks to the government's thrust in developing infrastructure in the country combined with the robust housing industry, cement demand over the next three years is expected to increase 8% per annum. Consolidation will also increase the pricing power of key players like Grasim in the long run (assuming that demand sustains). The company also acquired a 10% stake in Larsen & Toubro at Rs 306 per share (total consideration is estimated at Rs 7.6 bn). Modernisation of its cement plants, capacity expansion through debottlenecking. setting up captive power plants and export led growth could also enable Grasim to post higher margin growth in the coming years. The stock currently trades at Rs 291 implying a P/E multiple of 9x annualised nine months earnings.
LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India. Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407