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Grasim: Efficiency benefits - Views on News from Equitymaster
 
 
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  • Feb 1, 2002

    Grasim: Efficiency benefits

    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.

    (Rs m) 3QFY01 3QFY02 Change 9mFY01 9mFY02 Change
    Net sales 11,890 11,268 -5.2% 35,771 35,182 -1.6%
    Other Income 182 216 19.0% 517 559 8.2%
    Expenditure 9,815 9,334 -4.9% 29,958 29,000 -3.2%
    Operating Profit (EBDIT) 2,075 1,934 -6.8% 5,813 6,181 6.3%
    Operating Profit Margin (%) 17.5% 17.2%   16.2% 17.6%  
    Interest 593 514 -13.3% 1,810 1,467 -18.9%
    Depreciation 634 635 0.2% 1,886 1,880 -0.3%
    Profit before Tax 1,030 1,001 -2.8% 2,633 3,393 28.9%
    Extraordinary items (25) 100   (103) (448)  
    Tax 174 203 16.4% 387 707 82.7%
    Profit after Tax/(Loss) 831 899 8.1% 2,142 2,237 4.4%
    Net profit margin (%) 7.0% 8.0%   6.0% 6.4%  
    No. of Shares (m) 91.7 91.7   91.7 91.7  
    Diluted Earnings per share* 36.3 39.2   31.2 32.5  
    P/E Ratio (x)   7.4     8.9  

    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.

     

     

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