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Grasim: Fibre prices continue to dip - Views on News from Equitymaster
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Grasim: Fibre prices continue to dip
Feb 4, 2015

Grasim Industries has announced its financial results for the quarter ended December 2014. During the quarter, while the company's standalone sales increased by 12.6% YoY, net profit declined by 27.6% YoY. Here is our analysis of the results:

Performance summary
  • Standalone revenues increase by 6% YoY during 3QFY15 driven by strong growth in the chemical segment.
  • Operating profits decline by 15.1% YoY; operating margins contract from 13.4% in 3QFY14 to 10.7% in 3QFY15.
  • Effective tax rate increases from 28.2% in 3QFY14 to 31.8% in 3QFY15.
  • Net profits decline by 25.7% YoY during the quarter. Net profit margins decline from 8.7% in 3QFY14 to 6.1% in 3QFY15.

Standalone Financial Performance
(Rs m) 3QFY14 3QFY15 Change 9MFY14 9MFY15 Change
Net sales 14,558 15,433 6.0% 40,103 45,492 13.4%
Expenditure 12,613 13,782 9.3% 33,520 40,620 21.2%
Operating profit (EBITDA) 1,945 1,651 -15.1% 6,583 4,872 -26.0%
EBITDA margin 13.4% 10.7%   16.4% 10.7%  
Other income 492 468 -4.9% 3,662 3,460 -5.5%
Depreciation 547 629 15.0% 1,561 1,782 14.2%
Interest 134 116 -13.0% 306 263 -14.3%
Profit before tax 1,757 1,374 -21.8% 8,378 6,287 -25.0%
Tax 496 437 -11.8% 721 1,298 80.1%
Effective tax rate 28.2% 31.8%   8.6% 20.6%  
Profit after tax 1,261 937 -25.7% 7,657 4,989 -34.8%
Net margin 8.7% 6.1%   19.1% 11.0%  
No of shares (m)       91.8 91.8  
Diluted EPS (Rs)*         68.5  
P/E (times)*         57.1  
*trailing twelve month earnings

What has driven performance in 3QFY15?
  • Grasim's standalone topline witnessed a modest rise of 6% YoY during the quarter ended December 2014. Viscose Staple Fibre (VSF) sales volumes were almost flat at 97,001 metric tonnes during the quarter as compared to 97,049 metric tonnes during the corresponding quarter of the previous financial year. This was despite a 15% growth in production volumes as there was slowdown in the value chain due to weak VSF realisations. VSF prices continued to slide lower on account of excess global VSF capacity and falling prices of competing fibres such as cotton and PSF. The chemical business reported 70% YoY increase in sales. Sales volumes grew by 37% YoY to 106,516 metric tonnes in 3QFY15.

  • During the quarter, operating profits declined by 15.1% YoY owing to lower VSF realizations. Operating profit margins contracted from 13.4% in 3QFY14 to 10.7% in 3QFY15.

  • Owing to the poor operating performance during the quarter, the company's standalone net profits witnessed a decline of 25.7% YoY. Net profit margins contracted from 8.7% in 3QFY14 to 6.1% in 3QFY15.
What to expect?
Subdued VSF prices have been a cause of concern for Grasim profitability. Since fibre prices tend to be interlinked the sharp fall in cotton prices due to record high inventory and change in China's cotton policy has severely impacted VSF prices. Further, the sharp decline in international crude oil prices has caused a PSF (another competing fibre) prices to fall, which has made matters worse for VSF. As a result, there has been destocking in the value chain, thereby impacting sales volumes as well. So the near term outlook for VSF appears muted. Currently, a total capital expenditure of Rs 31.1 bn is under implementation for the standalone business.

At the current prices of Rs 3,912 the stock is trading at around 57 times its trailing twelve month standalone earnings. Based on our FY17 target price of Rs 4,245 for Grasim, you can expect returns of about 5% CAGR. We maintain our HOLD view on the stock.

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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