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Grasim: Topline grows but margins dip
Feb 3, 2014 | Updated on Feb 12, 2014

Grasim Industries has announced its financial results for the quarter ended December 2013. During the quarter, while the company's standalone sales increased by 19.8% YoY, net profits declined by 36.3% YoY. Here is our analysis of the results:

Performance summary
  • Standalone revenues increased by 19.8% YoY during 3QFY14 driven by higher VSF sales volumes.
  • Operating profits decline by 9.7%; operating margins contract from 17.7% in 3QFY13 to 13.4% in 3QFY14.
  • While other income falls by 48.3% YoY, depreciation charges and interest expenses increase by 38.4% YoY and 25% YoY respectively.
  • Effective tax rate increased from 24% in 3QFY13 to 28.2% in 3QFY14.
  • Net profits decline by 36.3% YoY during the quarter. Net profit margins decline from 16.3% in 3QFY13 to 8.7% in 3QFY14.
  • During the nine month period (9MFY14), while sales increased by 5.4% YoY, net profits declined by 10.3% YoY.

Standalone Financial Performance
(Rs m) 3QFY13 3QFY14 Change 9MFY13 9MFY14 Change
Net sales 12,157 14,558 19.8% 38,049 40,103 5.4%
Expenditure 10,003 12,613 26.1% 30,045 33,520 11.6%
Operating profit (EBITDA) 2,154 1,945 -9.7% 8,004 6,583 -17.8%
EBITDA margin 17.7% 13.4%   21.0% 16.4%  
Other income 951 492 -48.3% 3,901 3,662 -6.1%
Depreciation 395 547 38.4% 1,141 1,561 36.8%
Interest 107 134 25.0% 246 306 24.6%
Profit before tax 2,603 1,757 -32.5% 10,519 8,378 -20.4%
Tax 623 496 -20.5% 1,983 721 -63.7%
Effective tax rate 24.0% 28.2%   18.8% 8.6%  
Profit after tax 1,980 1,261 -36.3% 8,536 7,657 -10.3%
Net margin 16.3% 8.7%   22.4% 19.1%  
No of shares (m)       91.8 91.8  
Diluted EPS (Rs)*         123.9  
P/E (times)*         20.4  
*trailing twelve month earnings

What has driven performance in 3QFY14?
  • Grasim's standalone topline witnessed a rise of 19.8% YoY during the quarter ended December 2013. Viscose Staple Fibre (VSF) sales volumes were higher by 24% YoY at 97,049 metric tonnes during the quarter as compared to 78,579 metric tonnes during the corresponding quarter of the previous financial year. VSF realisations were under pressure on account of excess global VSF capacity. However, while VSF prices in the international markets fell by around 14% YoY, the impact on the company was neutralized on account of the rupee depreciation.

  • The chemical business reported 5.1% YoY increase in sales. While sales volumes were higher by 14% YoY at 77,634 metric tonnes in 3QFY14, realisations declined by 7.8% YoY.

  • During the quarter, operating profits declined by 9.7% YoY as raw material costs increased substantially by 6.9% (as a percentage of net sales) driven by high pulp prices. Operating margins contracted from 17.7% in 3QFY13 to 13.4% in 3QFY14.

    Operating cost break-up
    (Rs m) 3QFY13 3QFY14 Change
    Raw materials consumed 6,900 7,887  
    Purchase of stock-in-trade - 11  
    Change in inventory  (912) 280  
    Total raw materials cost 5,989 8,178 36.6%
    % of net sales 49.3% 56.2%  
    Employee expenses 994 964 -3.0%
    % of net sales 8.2% 6.6%  
    Power & fuel cost 1,835 2,061 12.3%
    % of net sales 15.1% 14.2%  
    Freight & handling expenses 172 256 48.4%
    % of net sales 1.4% 1.8%  
    Other expenses 1,014 1,155 14.0%
    % of net sales 8.3% 7.9%  
    Total operating expenditure 10,003 12,613 26.1%
    % of net sales 82.3% 86.6%  

  • Other income decreased by 48.3% YoY during the quarter. Depreciation charges and interest expenses increased by 38.4% YoY and 25% YoY respectively. As a result, profit before tax dropped by 32.5% YoY during the quarter.

  • The effective tax rate during the quarter increased from 24% in 3QFY13 to 28.2% in 3QFY14.

  • As a result, the company's standalone net profits witnessed a decline of 36.3% YoY. Net profit margins contracted sharply from 16.3% in 3QFY13 to 8.7% in 3QFY14.
What to expect?
The company reported strong topline performance driven by strong VSF sales volumes in both domestic and export markets. Higher production levels were aided by capacity augmentation due to the Harihar brownfield expansion. However, high pulp prices adversely impacted profit margins during the quarter. Moreover, the anti dumping duty imposed by China on pulp export impacted pulp volumes and realisations.

VSF realisations continued to remain under pressure owing to the overcapacity situation in China. However, the depreciation in the rupee limited the decline in VSF realisations for the company. The company's management expects profit margins to remain under pressure in the near term owing to uncertainty relating to China's cotton pricing policy and anti dumping duty on pulp exports.

Notwithstanding 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. The long term outlook for VSF continues to be favourable in comparison to other fibres.

As far as the company's expansion plans are concerned, the company's epoxy unit at Vilayat, Gujarat, which has a capacity of 51,500 tonnes per annum, has commenced production. It has also commissioned a 25 MW thermal power plant in Andhra Pradesh. During 9MFY14, the company incurred a capex of Rs 7.52 bn for the standalone business. Currently, a total capital expenditure of Rs 42.17 bn is under implementation for the standalone business.

At the current prices of Rs 2,587 the stock is trading at 20.9 times its trailing twelve month standalone earnings. Given the overall slowdown in the domestic and global economy as well as the overcapacity situation in VSF, we reiterate our 'Hold' view on the stock from a 2-3 year perspective.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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