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Grasim: Robustness continues… - Views on News from Equitymaster
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Grasim: Robustness continues…
Apr 25, 2007

Performance summary
Diversified major, Grasim, has announced its 4QFY07 and full year FY07 results and it has continued to report robust numbers. While the company’s topline grew by 37% YoY during the quarter, net profits increased by a healthy 81%. On account of robustness in demand for cement and VSF, increased capacity utilisation and improved realizations, the company has managed to increase its operating margins by around 450 basis points (4.5%) and 470 basis points (4.7%), for the quarter and full year. Further, savings in operating costs resulting from ongoing modernisation efforts, energy optimization and sweating of assets have also helped company report outstanding performance for the quarter and full year. On a consolidated basis too, results have been encouraging during 4QFY07. Revenue growth was 40% YoY and net profit recorded a notable growth of 60% YoY.

Financial performance snapshot
(Rs m) 4QFY06 4QFY07 Change 12mFY06 12mFY07 Change
Net sales 18,151 24,938 37.4% 66,557 86,757 30.4%
Expenditure 14,086 17,995 27.8% 52,339 62,663 19.7%
Operating profit (EBITDA) 4,065 6,942 70.8% 14,218 24,094 69.5%
EBITDA margin 22.4% 27.8%   21.4% 27.8%  
Other income 575 776 34.9% 1,691 2,097 24.0%
Interest 236 366 55.5% 973 1,118 -97.9%
Depreciation 759 876 15.3% 2,916 3,179 9.0%
Profit before tax/(loss) 3,645 6,476 77.7% 12,019 21,893 82.1%
Extraordinary Item 41 371   41 371  
Tax 1,059 2,102 98.5% 3,428 6,906 101.4%
Profit after tax/(loss) 2,627 4,745 80.6% 8,632 15,358 77.9%
Net margin 14.5% 19.0%   13.0% 17.7%  
No of shares (m) 92 92   92 92  
Diluted EPS (Rs)*         167.2  
P/E (times)         14.8  
*trailing twelve month earnings

What is the company's business?
Grasim, an Aditya Birla Group company, has presence in various businesses. It has presence in viscose staple fiber, cement, sponge iron, chemicals and textiles. While the company is a world leader in VSF with a 23% market share, it is also the eleventh largest producer of cement in the world with a total consolidated capacity of 31 MT (nearly 20% of the country's capacity).

What has driven performance in 3QFY07?
The two pillars - ‘Cement & VSF’: The excellent performance of the company has been driven by its two pillars cement and VSF and its subsidiary companies.

Cement business that forms 60% of the company’s total revenues has continued to report robust performance on account of improved realisations and higher utilisation levels. The segment sales were higher by almost 34% YoY during 4QFY07. The company operated at 118% capacity utilisation levels. In 4QFY07, apart form significant improvement in sales volumes, a more than 35% YoY growth in realisations has helped company offset the impact of rising input costs like fuel and freight costs.

VSF business too reported robust numbers for 4QFY07 and full year. Though the company suspended its operations for 48 days on account of water shortage, the net sales of this business segment grew by almost 32% YoY on account of improved realisations and almost 100% capacity utilisation levels. Strong demand for cellulosic fibres and the company’s strategy to focus on speciality fibres coupled with concentration on emerging textile hubs has resulted in a strong performance by the company. During the quarter, the business reported 5% growth in production and 13% growth in sales volumes as compared to the same quarter last year. The realisations were higher by 15% YoY, which have further aided the robust growth and also helped company to offset steep rise in input costs.

Other segments-normalised operations: Sponge iron business, which remained under pressure during first three quarters of the year ended FY07, witnessed a marked improvement in performance during 4QFY07 on account of higher volumes (production higher by 54% YoY and sales grew by 79% YoY) and realisation (higher by 24% YoY). Also, improvement in operations on account of alternative use of fuels and commissioning of a new small reactor that resulted in minimized use of pellets, helped matters.

The performance of the chemical business was constrained in the last few quarters due to breakdown of a captive power plant that remained shut during 2nd and 3rd quarter. However, during 4QFY07, normalcy in operations was resorted on account of completion of captive power plant maintenance. During the quarter, though realisations remained almost flat, higher volumes (production was higher by 10% YoY and sales volumes registered a growth of 8% YoY) resulted in 5% YoY growth in net sales. All this coupled with reduction in power costs resulted in 26% YoY growth in operating profits.

The textile business that forms merely 3% of total revenues witnessed 6% YoY growth in net sales on account of its exit from un-remunerative export market and focus on supply to global and domestic brands.

What to expect?
The stock currently trades at Rs 2,469, implying a price to earnings (P/E) multiple of 22 times our FY09E consolidated earnings. Though from a medium term perspective, we are positive on the company’s performance and growth prospects of the two pillars, cement and VSF, we believe that at the current juncture much of it is priced into the stock.

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