Grasim has announced its unaudited fourth quarter and FY02 results. If the numbers are anything to go by, the company has done well in spite of exceptional losses reported by it. For the fourth quarter, Grasim has reported a 40.5% drop in net profits while registering a 3.9% drop in sales. For FY02, the drop in topline has been marginal at 2%, while the net earnings dropped by nearly 20% to Rs 3 bn.
Operating Profit (EBDIT)
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The cement business has been the main growth driver for the company in FY02. Grasim reported a 6% rise in sales on the back of a 5% increase in production volumes. While the growth in the cement business has been encouraging, revenues from the VSF business of the company recorded a negative growth of 11% due to depressed prices and the general economic slowdown, which has affected the textiles business. The negative growth in the cash generating VSF business has led to a marginal fall in the topline in spite of the growth in the cement revenues. The company’s sponge iron and caustic soda businesses have shown dismal results in FY02.
Revenues (in Rs m)
On the operational front, the total expenses of the company have gone down marginally by 2.3% YoY due to the closing down of the Mavoor plant in Kerala owing to environmental reasons. Rationalisation of the work force and the selling of the loss making textile plant in Gwalior plant is likely to lead to further cost control in the coming years. The company has also managed to bring down the finance cost by 20.3% YoY through substitution of debt and effective working capital management.
The company has aggressively initiated a process of restructuring for loss making businesses. Grasim has recently sold off its textiles unit in Gwalior and plans to produce fabrics from only one plant at Bhiwani. The company has incurred an extraordinary loss of Rs 319 m in the process. It also recorded loss of Rs 181 m from sale of its subsidiary Birla Technologies to PSI Data Systems. The company has also incurred VRS expenses to the tune of Rs 280 m. If these extraordinary one-time adjustments are kept aside, then the company has actually posted 18% growth in net profits YoY for FY02. These figures show that the positive effects of the restructuring exercise have already started to pay off.
Going forward the company is likely to benefit from the upturn in the cement industry. The cement industry is expected to grow at nearly 8% in the next two years. This coupled with an aggressive focus on cement is likely to increase the earnings of the company. The operating margins of the cement business are still lower than industry leaders like Gujarat Ambuja and Madras Cements. Hence, there is enough scope for Grasim to improve efficiencies going forward and consequently, its valuations. Any upturn in the economy is likely to benefit the VSF business but this seems unlikely in the short to medium term due to poor industry growth rates and lack of indicators pointing to economic revival.
Restructuring in the company is expected to cut losses from the sponge iron and the textiles units. This should aid valuations going forward. The stock is currently trading at Rs 305, at a P/E of 9.3x FY02 earnings.
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