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Grasim: Hit by weak VSF prices & high costs

Feb 1, 2013

Grasim Industries has announced its financial results for the quarter ended December 2012. During the quarter, the company has reported a decline of 3% YoY and 28% YoY in standalone net sales and net profits respectively. Here is our analysis of the results:

Performance summary
  • Standalone revenues decline by 3.1% YoY during 3QFY13 on account of drop in VSF prices.
  • Operating margins decline from 23% in 3QFY12 to 17.9% in 3QFY13 on account of higher input costs.
  • At the bottomline level, net profits plunge by 27.9% YoY on account of poor operating and non-operating performance.
  • Net margins decline from 22.1% in 3QFY12 to 16.4% in 3QFY13.

Unaudited Standalone Financial Performance
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Net sales 12,429 12,039.6 -3.1% 34,840 37,775 8.4%
Expenditure 9,575 9,886 3.3% 25,397 29,771 17.2%
Operating profit (EBITDA) 2,854 2,154 -24.5% 9,443 8,004 -15.2%
EBITDA margin 23.0% 17.9%   27.1% 21.2%  
Other income 1,093 951 -12.9% 4,105 3,901 -5.0%
Depreciation 366 395 8.0% 1,073 1,141 6.4%
Interest 72 107 49.2% 284 246 -13.6%
Profit before tax/(loss) 3,509 2,603 -25.8% 12,190 10,519 -13.7%
Tax 765 623 -18.5% 2,856 1,983 -30.6%
Effective tax rate 21.8% 24.0%   23.4% 18.8%  
Profit after tax/(loss) 2,745 1,980 -27.9% 9,335 8,536 -8.6%
Net margin 22.1% 16.4%   26.8% 22.6%  
No of shares (m)       91.7 91.8  
Diluted EPS (Rs)*         119.6  
P/E (times)*         27.7  
*trailing twelve month earnings

What has driven performance in 3QFY13?
  • Grasim's standalone topline witnessed a decline of 3.1% YoY during the quarter ended December 2012. The lacklustre topline was on account of tough market conditions coupled with surplus viscose staple fibre (VSF) capacity in China and significantly low cotton prices on account of large inventory.

  • The viscose staple fibre (VSF) business which accounts for 85.5% of the company's standalone sales declined by 5% YoY during the quarter. The volume sales during the quarter stood at 78,579 metric tonnes (mt) against 78,216 mt in the corresponding quarter of the previous financial year, reporting a meagre growth of 0.5%. VSF realisations declined by 5.4% YoY during the quarter. There was a sharp 14% YoY fall in global VSF prices. The company was relatively less impacted on account of the rupee depreciation.

  • The chemical business reported 12.2% YoY rise in sales. While sales declined by 4.4% YoY on account of water shortage, better caustic realisations resulted in positive revenue growth. Firm caustic soda prices pushed ECU realisations higher by about 13% YoY.

  • During the quarter, operating profits declined by 24.5% YoY. This was on account of a significant jump in input costs. Total raw material costs, employee expenses and other expenses surged by 1.7% YoY, 1.5% YoY and 1.1% YoY (as a percentage of net sales) during the period. Owing to this, operating margins contracted from 23% in 3QFY12 to 17.9% in 3QFY13.

    Operating cost break-up
    (Rs m) 3QFY12 3QFY13 Change
    Raw materials consumed 6,513 6,900  
    Purchase of stock-in-trade 40 -  
    Change in inventory (576) (912)  
    Total Raw materials cost 5,977 5,989 0.2%
    % of net sales 48.1% 49.7%  
    Employee expenses 838 994 18.7%
    % of net sales 6.7% 8.3%  
    Power & fuel cost 1,803 1,835 1.8%
    % of net sales 14.5% 15.2%  
    Freight & handling expenses 172 172 0.2%
    % of net sales 1.4% 1.4%  
    Other expenses 786 896 14.1%
    % of net sales 6.3% 7.4%  
    Total operating expenditure 9,574.6 9,886.1 3.3%
    % of net sales 77.0% 82.1%  

  • While other income decreased by 12.9% YoY during the quarter, depreciation charges and interest expenses increased by 8% YoY and 49.2% YoY.

  • Overall weak operating performance resulted in a decline of 27.9% YoY at the bottomline level. Net profit margins contracted from 22.1% in 3QFY12 to 16.4% in 3QFY13.

  • The company's expansion plans are generally on track. Volumes are expected to be generated from the first quarter of the financial year 2013-14 (1QFY14). Once the new capacities are commissioned, the VSF capacity would increase by about 40%.

  • Currently, a total capital expenditure of Rs 42.67 bn is under implementation for the standalone business and is expected to be incurred over the current fiscal and the next (FY14). Of this, Rs 18.55 bn has been already expended during 9MFY13.

What to expect?
Factors such as the slowdown in the global textile industry and the overcapacity in China are likely to affect the VSF business over the short to medium term. Despite the medium term concerns, Grasim's well-integrated operations and its leadership position in the VSF market are likely to hold the company in good stead over the long term.

At the current prices of Rs 3,007 the stock is trading at 27.7 times its trailing twelve month standalone earnings. We recommend a 'Hold' on the stock from a 2-3 year perspective.

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Jun 15, 2021 (Close)