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Grasim: Not so impressive - Views on News from Equitymaster
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Grasim: Not so impressive
Apr 29, 2008

Performance summary
  • On a consolidated basis, the company has reported 15% YoY and 21% YoY topline growth during 4QFY08 and FY08 respectively.
  • On a standalone basis, revenues grow by 19% on a YoY basis, largely led by growth in two of its core businesses viz. VSF and cement.

  • Ultratech, the subsidiary of the company has fared well during the quarter with topline growing by 12% YoY and robust 29% YoY growth in bottomline.

  • Standalone operating profits grow by 29% YoY for the full year led by a 240 basis point expansion in operating margins. Net profits have witnessed a growth of 45% YoY.

  • The company has declared dividend of Rs 30 per share.

Financial performance snapshot
Consolidated Standalone
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change FY07 FY08 Change
Net sales 40,896 47,147 15.3% 141,416 170,370 20.5% 86,438 102,781 18.9%
Expenditure 29,280 35,175 20.1% 100,972 120,142 19.0% 62,345 71,684 15.0%
Operating profit (EBITDA) 11,615 11,972 3.1% 40,444 50,228 24.2% 24,094 31,097 29.1%
EBITDA margin 28.4% 25.4% 28.6% 29.5% 27.9% 30.3%
Other income 781 1,174 50.2% 2,456 3,992 62.5% 2,097 3,148 50.1%
Interest 658 603 -8.3% 2,286 2,221 -2.8% 1,118 1,070 -4.3%
Depreciation 1,652 1,824 10.4% 6,100 6,703 9.9% 3,179 3,533 11.1%
Profit before tax/(loss) 10,087 10,719 6.3% 34,514 45,296 31.2% 21,893 29,642 35.4%
Extraordinary item - 2,824 - 2,824 371 2,307 521.9%
Tax 3,353 3,662 9.2% 10,922 14,658 34.2% 6,906 9,623 39.4%
Profit after tax/(loss) 6,734 9,881 46.7% 23,593 33,462 41.8% 15,358 22,326 45.4%
Minority share (1,146) (1,114) (3,915) (4,565) - -
Share in profit / (loss) of associates (4) 40 (4) 18 - -
Net profit 5,584 8,808 57.7% 19,674 28,914 47.0% 15,358 22,326 45.4%
Net margin 16.5% 21.0% 16.7% 19.6% 17.8% 21.7%
No of shares (m) 92 92
Diluted EPS (Rs)* 315.3
P/E (times) 7.7
*trailing twelve month earnings

What has driven performance in FY08?
  • As usual, Grasimís topline growth was supported by growth across its offerings. Cement and VSF, the core business segments of the company that contribute over 85% to the total revenues, grew by 15% YoY and 30% YoY respectively.

  • The VSF business, which is Grasimís cash cow, was impacted during 4QFY08, consequently pulling down the full year performance. This was mainly on account of deceleration in demand, primarily due to slowdown of textile demand in the US, liquidation of inventory in the value chain and antidumping investigation by Turkey on VSF imports. Though realisations were up by 21% YoY, cost concerns continued with rising sulphur prices, one of the key raw materials. In the short term, owing to rising pulp and sulphur prices coupled with softening of VSF prices, margins are expected to remain under pressure.

  • Cement business clocked 15% YoY growth. While volumes grew by 7% (both production and sales), realisations seem to have increased by almost 8% YoY. However, rising fuel costs continued to pressurise operating margins. Overall segmental PBIT margins remained steady at 28.3% in FY08 (28.1% in FY07). Having said that, as announced capacities start coming on stream and rising operational costs show no signs of cooling off, margins are likely to be adversely impacted going forward.

  • The chemical and the sponge iron business, which was once considered the black sheep, reported impressive numbers. The chemical business was affected last year due to breakdown of a captive power plant. However, as it came back to normalcy, the production and sales volumes in FY08 were up by 38% YoY and 36% YoY. The growth to some extent can be attributed to the low base effect. Though realisations were lower and raw material prices such as coal continued to rise, the company was able to expand the PBIT margins from 18.8% in FY07 to 27.5% in FY08.

  • The production of the sponge iron division was curtailed by 20% during 4QFY08 on account of inadequate supply of natural gas coupled with high prices of alternate fuels. This resulted in the 18% YoY decline in sales volumes in 4QFY08. However, for the full year, production grew by 7%, while sales volumes declined by 2% YoY. While on the volume front, the performance was volatile, the division reported almost 26% YoY growth in revenues on account of surge in global scrap prices that led to better realisations.

What to expect?
Grasim has outlined huge capex plans to augment consolidated capacity of cement to 48.7 MTPA. The company has also plans to increase VSF capacity at Harihar (Karnataka) by 31,000 tonnes at an outlay of Rs. 3,350 m, which is expected to be operational in 3QFY10 and an 88,000 TPA greenfield project at Vilayat (Gujarat). The total investment outlined on a consolidated basis works out to Rs 44 bn over the next two years towards building up capacity and rationalisation of costs by improving operational efficiency.

However, the cement industry is expected to witness excess supply as capacities come on stream leading to a downward correction in the current high realisations. As the cement division contributes over 55% to the topline of the company, the muted growth going forward will impact overall performance of the company. Also, in the near to medium term the VSF business is expected to remain under pressure for similar reasons.

At the current price of Rs 2,434, the stock is trading at 12 times our estimated FY10 consolidated earnings. Considering the above-mentioned factors, investors should practice caution while investing in the stock. We shall soon update our research report on the company.

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