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Grasim: VSF continues to be a drag - Views on News from Equitymaster
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Grasim: VSF continues to be a drag
Feb 2, 2009

Performance summary
  • On a standalone basis, topline grows by 2.3% YoY during 3QFY09. The VSF business segment continues to weigh heavy on the growth prospects of the company.
  • Operating costs continue to grow at double digit rate.
  • Higher input and energy costs dent EBITDA margins (down to 18.8% in 3QFY09 from 32.4% in 3QFY08).
  • In line with operating profits, bottomline declines by 40% YoY.
  • On a consolidated basis, topline registers 6.3% YoY growth, while net profits decline by 33.8% YoY.
  • The company’s subsidiary - Ultratech reports 18% YoY growth in topline. Net profits fall by nearly 15% YoY.

Financial performance snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 25,931 26,536 2.3% 74,883 79,170 5.7%
Expenditure 17,522 21,540 22.9% 50,884 61,005 19.9%
Operating profit (EBITDA) 8,409 4,995 -40.6% 23,999 18,166 -24.3%
EBITDA margin 32.4% 18.8%   32.0% 22.9%  
Other income 796 806 1.2% 2,436 2,766 13.6%
Interest 234 444 89.6% 798 1,037 29.8%
Depreciation 865 1,198 38.5% 2,590 3,316 28.0%
Profit before tax/(loss) 8,106 4,159 -48.7% 23,046 16,579 -28.1%
Extraordinary Item 48 -   48 -  
Tax 2,616 864 -67.0% 7,441 3,946 -47.0%
Net profit 5,538 3,296 -40.5% 15,652 12,633 -19.3%
Net margin 21.4% 12.4%   20.9% 16.0%  
No of shares (m)       92 92  
Diluted EPS (Rs)*         210.6  
P/E (times)         5.6  
*trailing twelve month earnings

What has driven performance in 3QFY09?
  • During 3QFY09, the company reported 2.3% YoY growth in topline on a standalone basis. The growth was pulled down by the VSF segment, which contributing over 20% to the topline of the company, reported 29% YoY fall in revenues. The recessionary trend witnessed globally pulled down demand for the textiles products. Lower demand resulted in sales volumes declining by 22% YoY. Lower realisations (down 11% YoY) coupled with higher input costs (higher sulphur and pulp prices) and depreciating rupee had further worsened the case. All this resulted in steep fall of 81% YoY in EBIDTA of the VSF segment. EBIDTA margins were down to 11% in 3QFY09 from 42% in 3QFY08.

  • The demand for VSF is expected to remain muted till the time revival in economic growth is seen. Signs of recovery in domestic and western markets are expected to boost demand for the commodity. However, lower realisations will arrest expansion in margins despite lower input costs. To prevent substitution by competing fibres and imports, the company has further reduced prices of VSF (by Rs 7 per kg.) with effect from January, 2009. The company has deferred expansion of its Chinese joint venture. While the rationale for the same has not been divulged, the same could be attributed to lower demand and priority of liquidating piled up inventory amidst the credit squeeze.

  • The cement business witnessed 15% YoY growth in revenues backed by growth in volumes and better realisations. The company saw its volumes grow by 7% YoY during 3QFY09, while RMC volumes were higher at 18% YoY. The company was able to cater to healthy growth in sectoral demand on account of capacity expansion. Despite higher volumes and improved realisations, the company reported 11% YoY decline in PBIDT owing to higher input costs such as energy, raw material, freight and employee costs. While impact of lower input costs such as crude prices will start flowing in 4QFY09, the same is expected to get offset by slowing demand (slowdown in real estate and infrastructure sectors) owing to moderation of economic growth and vanishing pricing power as planned capacities commence operations.

  • The chemical segment revenues grew by nearly 16% YoY during 3QFY09 led by growth in volumes and realisations. Sales volumes were higher by 9% YoY on account of 3% YoY growth in production and stock liquidation. The higher caustic soda prices were negated by abnormally lower chlorine prices and HCl prices. Poor chlorine realisation and higher input costs such as salt and power exerted pressure on PBITD margins that shrunk by 14.4% YoY in 3QFY09. Going forward, lower input cost is expected to sustain margins at the current level. However, lower demand for the fibre segment is likely to hurt growth in volumes.

  • The sale of the sponge iron business is expected to be completed by the end of FY09. During 3QFY09, the segment reported nearly 22% YoY growth in revenues on account of higher realisations (up 49% YoY). The lower volumes arrested the growth of the segment. The production and sales volumes were lower by 21% YoY and 15% YoY respectively on account of lower demand from the end user industries like steel that has announced production cuts. PBITD margins contracted by 4.4% during the 3QFY09 as compared to the same period last year on account of increased raw material costs and overhead expenses.

What to expect?
Considering the fact that the company is the only player in the VSF business domestically and the outlook of VSF and the cement sector from a long-term point of view remains positive, we believe that these two divisions will continue to be the growth drivers of the company. However, in the near to medium term, softening of prices of both the commodities would arrest the overall growth of the company.

The stock currently trades at Rs 1,180, implying a price to earnings (P/E) multiple of 7.5 times our FY11 estimated standalone earnings. We expect the company to end the year nearly in line with our full year estimates. Considering the asset valuation method, which we apply to value the diversified major on a sum of the parts basis we maintain our view on the To Read the Full Story, Subscribe or Sign In

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