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Grasim: Hit by lower VSF prices & high costs
May 7, 2012

Grasim Industries has announced its financial results for the quarter and full financial year ended March 2012. The company's standalone sales and net profits dropped by 3% YoY and 38% YoY respectively during the quarter ended March 2012. Here is our analysis of the results:

Performance Summary
  • Standalone revenues drop by 3% YoY during 4QFY12 on account of year-on-year (YoY) decline in VSF realisations.
  • Operating margins decline from 32.6% in 4QFY11 to 15.6% in 4QFY12 on account of high input costs.
  • At the bottomline level, net profits decrease by 38% YoY on account of poor show at the operating level. Net margins decline from 27.7% in 4QFY11 to 17.5% in 4QFY12.
  • During full financial year (FY12), while sales grow by 7% YoY, net profits remain flat.


Standalone Financial Performance
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Net sales 14,256 13,885 -2.6% 45,428 48,724 7.3%
Expenditure 9,611 11,717 21.9% 31,210 37,114 18.9%
Operating profit (EBITDA) 4,645 2,168 -53.3% 14,218 11,611 -18.3%
EBITDA margin 32.6% 15.6%   31.3% 23.8%  
Other income 1,179 1,503 27.5% 3,950 5,607 41.9%
Interest 133 74 -44.7% 458 358 -21.8%
Depreciation 423 369 -12.6% 1,763 1,442 -18.2%
Profit before tax/(loss) 5,268 3,228 -38.7% 15,947 15,418 -3.3%
Tax 1,313 792 -39.6% 4,130 3,648 -11.7%
Profit after tax/(loss) 3,955 2,436 -38.4% 11,817 11,770 -0.4%
Net margin 27.7% 17.5%   26.0% 24.2%  
No of shares (m)       91.7 91.7  
Diluted EPS (Rs)*         128.3  
P/E (times)*         19.6  
*trailing twelve month earnings

What has driven performance in 4QFY12?
  • Grasim's standalone topline witnessed a decline of 2.6% YoY during the quarter ended March 2012. The decline was mainly on account of 16% YoY drop in viscose staple fibre (VSF) realisations. It must be noted that prices of all fibres including VSF were at their peak during the corresponding quarter of the previous financial year (4QFY11) due to shortage of cotton. However, the fall in topline was arrested due to 11% increase in VSF sales volumes, which stood at 94,904 tonnes for the quarter.

  • While VSF realisations were lower during the quarter, operating costs were significantly higher on account of significant increase in price of coal and caustic soda. As result, the cost of raw materials and power & fuel surged by about 1033 basis points (10.3%) and 327 basis points (3.3%) as a percentage of net sales, respectively. Owing to this, operating margins declined from 32.6% in 4QFY11 to 15.6% in 4QFY12.

  • Other income was higher by 27.5% YoY during the quarter. Interest expenses declined by 44.7% YoY on account of interest subsidy from state government of Rajasthan. Depreciation charges also dropped by 12.6% YoY during the quarter.

  • Non-operating items helped in offsetting the poor operating performance to a certain extent. Net profits dropped by 38.4% YoY during 4QFY12. Net profit margins declined from 27.7% in 4QFY11 to 17.5% in 4QFY12.

  • Grasim's board of directors has recommended a dividend of Rs 22.5 per share for the financial year 2011-12.

  • The company's expansion plans are progressing as per schedule. The VSF (120,000 TPA) and Chemical (182,500 TPA) greenfield projects at Vilayat (Gujarat) are expected to be commissioned towards the end of the financial year 2012-13. The brownfield VSF project (36,500 TPA) at Harihar (Karnataka) is expected to be commissioned in two phases during the current year.

What to expect?
Several factors such as the slowdown in Eurozone and China, better cotton crop and new capacities in China adversely affected international VSF prices. In the near to medium term, these concerns are likely to have a bearing on the prospects of VSF. However, Grasim is a well-integrated player in the VSF market, commanding a leadership position.

At the current price of about Rs 2,520 the stock is trading at 19.6 times trailing 12 month standalone earnings. We maintain our "Buy" view on the stock from a 2-3 years perspective.

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