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Grasim: Pressure on VSF prices continues
May 6, 2013

Grasim Industries has announced its financial results for the quarter ended March 2013. During the quarter, the company reported 1.1% YoY decline in standalone net sales, while net profits rose by 52.9% YoY. Here is our analysis of the results:

Performance summary
  • Standalone revenues decline by 1.1% YoY during 4QFY13 on account of drop in VSF prices.
  • Operating margins remain at 15.6% during the quarter, the same level as 4QFY12.
  • While other income declines by 21.4% YoY, depreciation charges and interest expenses increase by 22.2% YoY and 96.7% YoY respectively.
  • Exceptional gains on account of sale of long term investments led net profits to surge by 52.9% YoY.
  • During the financial year 2012-13 (FY13) sales and net profits rose by 6.3% YoY and 4.2% YoY respectively.

Standalone Financial Performance
(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
Net sales 13,923 13,765 -1.1% 48,763 51,814 6.3%
Expenditure 11,755 11,624 -1.1% 37,152 41,668 12.2%
Operating profit (EBITDA) 2,168 2,141 -1.2% 11,611 10,145 -12.6%
EBITDA margin 15.6% 15.6%   23.8% 19.6%  
Other income 1,503 1,181 -21.4% 5,607 5,082 -9.4%
Depreciation 369 451 22.2% 1,442 1,592 10.4%
Interest 74 145 96.7% 358 391 9.1%
Profit before tax and exceptional items 3,228 2,726 -15.5% 15,418 13,245 -14.1%
Exceptions gains/ (losses) - 2,044   - 2,044  
Profit before tax 3,228 4,770 47.8% 15,418 15,289 -0.8%
Tax 792 1,046 32.1% 3,648 3,029 -17.0%
Effective tax rate 24.5% 21.9%   23.7% 19.8%  
Profit after tax 2,436 3,724 52.9% 11,770 12,260 4.2%
Net margin 17.5% 27.1%   24.1% 23.7%  
No of shares (m)       91.7 91.8  
Diluted EPS (Rs)*         133.6  
P/E (times)*         22.2  
*trailing twelve month earnings

What has driven performance in 4QFY13?
  • Grasim's standalone topline witnessed a decline of 1.1% YoY during the quarter ended March 2013. The lacklustre topline was on account of tough market conditions in the textile industry owing to the slowdown in the global economy. VSF volumes sales were higher by merely 0.3% at 95,161 metric tonnes during the quarter as compared to 94,904 metric tonnes during the corresponding quarter of the previous financial year. VSF realisations were under pressure on account of excessive viscose staple fibre (VSF) capacity in China and significantly high cotton inventory. While global VSF prices fell by around 10% YoY, the impact on the company was restricted to about 1% owing to the rupee depreciation.

  • The chemical business reported 2.3% YoY rise in sales. While sales volumes were lower by 8.9% YoY to 66,357 metric tonnes in 4QFY13, realisations were higher on account of improved chlorine prices.

  • During the quarter, operating profits declined by 1.2% YoY, in line with the topline decline. While other expenses surged by 1.1% YoY (as a percentage of net sales), raw material and power & fuel expenses declined by 1.1% YoY and 0.5% YoY respectively (as a percentage of net sales) during the period. Operating margins remained at 15.6% in 4QFY13, the same level as in 4QFY12.

    Operating cost break-up
    (Rs m) 4QFY12 4QFY13 Change
    Raw materials consumed 6,298 6,519  
    Purchase of stock-in-trade 76 -  
    Change in inventory 1,200 821  
    Total Raw materials cost 7,574 7,340 -3.1%
    % of net sales 54.4% 53.3%  
    Employee expenses 939 965 2.7%
    % of net sales 6.7% 7.0%  
    Power & fuel cost 1,810 1,718 -5.1%
    % of net sales 13.0% 12.5%  
    Freight & handling expenses 230 258 12.3%
    % of net sales 1.6% 1.9%  
    Other expenses 1,202 1,342 11.6%
    % of net sales 8.6% 9.8%  
    Total operating expenditure 11,755 11,624 -1.1%
    % of net sales 84.4% 84.4%  

  • While other income decreased by 21.4% YoY during the quarter, depreciation charges and interest expenses increased by 22.2% YoY and 96.7% YoY respectively. As a result, profit before tax and exceptional items dropped by 15.5% YoY during the quarter.

  • The company reported exceptional gains of Rs 2,044.3 m as it exited from unrelated businesses by disinvestments of shares in Alexandria Carbon Black and Thai Carbon Black. This gave a boost to the net profits, resulting in a rise of 52.9% YoY.

  • During the financial year 2012-13 (FY13), the company's standalone sales and net profits grew by 6.3% YoY and 4.2% YoY respectively.

  • The second phase of brownfield VSF expansion (18,250 TPA) and captive power plant (20 MW) at Harihar have been commissioned. The chemical capacity expansion of 182,500 TPA at Vilayat has also been commissioned.

  • The VSF greenfield expansion (120,000 TPA), power plant (90 MW) and epoxy plant (51,000 TPA) at Vilayat are nearing completion and expected to be commissioned during the first half of the year.

  • A major revamp has been undertaken at the company's VSF plant at Nagda and will be completed over the next two years.

  • The company incurred a capex of Rs 24.17 bn during FY13 for the standalone business. Currently, a total capital expenditure of Rs 41.93 bn is under implementation for the standalone business. Of this, Rs 26.88 bn is under work-in-progress. The balance net capex of Rs 15.05 bn will be spent over FY14 (Rs 12.24 bn) and FY15 (Rs 2.81 bn).

  • The company's board of directors has declared a dividend of Rs 22.5 per share for the financial year FY13. At the current price, this translates to a dividend yield of 0.8%. It must be noted that the company had paid the same amount as dividend last year.

What to expect?
Factors such as the slowdown in the global textile industry and the overcapacity situation in China are likely to affect the VSF business over the short to medium term. It is worth noting that about 1.3 million tonnes VSF capacity has been added globally over the last two years. Moreover, Grasim's new capacities will further add to the oversupply situation. As such, the pressure on VSF prices may continue to persist.

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. At the current prices of Rs 2,960 the stock is trading at 22.2 times its trailing twelve month standalone earnings. We reiterate our 'Hold' view on the stock from a 2-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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