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Grasim: Profitability blues - Views on News from Equitymaster
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Grasim: Profitability blues
May 20, 2009

Performance summary
  • On a standalone basis, topline grows by 5.8% YoY during FY09, supported by growth in cement business.
  • Operating profits have come in lower by 18% YoY as costs continued to grow at double digit rate. 18% fall in operating profits and higher depreciation and finance charges led to a 24% YoY decline in profit before taxes.
  • On a consolidated basis, topline growth stands at 8.4% YoY, net profits fall by 24.4% YoY.
  • The company’s subsidiary - UltraTech reports a 16% YoY growth in topline, while bottomline declines by 3% YoY.

Financial performance snapshot
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 27,268 28,870 5.9% 102,151 108,040 5.8%
Expenditure 20,800 22,070 6.1% 71,684 83,075 15.9%
Operating profit (EBITDA) 6,468 6,800 5.1% 30,467 24,965 -18.1%
EBITDA margin 23.7% 23.6% 29.8% 23.1%
Other income 1,343 738 -45.0% 3,778 3,504 -7.3%
Interest 272 385 41.6% 1,070 1,421 32.8%
Depreciation 942 1,253 33.0% 3,533 4,570 29.4%
Profit before tax/(loss) 6,597 5,900 -10.6% 29,642 22,478 -24.2%
Extraordinary Item 2,260 2,307 -
Tax 2,182 2,053 -5.9% 9,623 5,999 -37.7%
Net profit 6,674 3,847 -42.4% 22,326 16,480 -26.2%
Net margin 24.5% 13.3% 21.9% 15.3%
No of shares (m) 92 92
Diluted EPS (Rs)* 179.7
P/E (times) 12.6
*trailing twelve month earnings

What has driven performance in FY09?
  • Cement and VSF are the two major pillars of the company that make up 80% of the company’s total revenues. The company’s FY09 performance was largely supported by growth in its cement business. While the company has reported a 5.8% YoY growth in topline, net profit growth reported a decline of 26% YoY. The same is mainly on account of higher cost of operation that resulted in 18% YoY decline in operating profits and higher depreciation and interest costs. Depreciation charges were on higher side on account of commissioning of several new projects and the company had also re-estimated useful life of some of its assets on account of which depreciation is higher by Rs 63 m in 4QFY09. Going forward, the company will continue to strengthen its leadership position in the cement and VSF businesses.

  • VSF, which contributes over 20% to the topline reported a lower growth of 16% YoY, restricting the overall growth of the company. The recessionary trend witnessed globally pulled down demand for textiles products. This has impacted VSF business during the year. However, during 4QFY09, volumes were higher on account of restocking by customers. But a sharp fall in realisations pulled down the overall growth of the segment. Apart from lower sales growth, higher cost of operation (which is mainly a result of weakening rupee that boosted cost of imported inputs) exerted pressure on PBIT margins. PBIT margins contracted from 33.6% in FY08 to 16.2% in FY09.

  • The cement segment reported a 17% YoY growth in sales led by 6% YoY growth in volumes. During 4QFY09, volumes were higher by 13% YoY supported by new capacities that became operational only towards the end of FY09. The company had surpassed the industry growth rate of 9 %YoY in 4QFY09. Unprecedented increase in prices of imported coal and pet coke continue to exert pressure on overall profitability of the segment. PBIT margins declined by 4.9% to 23.3% in FY09.

  • The chemical segment revenues were higher by 25% YoY during FY09 led by historically high sales volumes (11% YoY growth) and better realisations (higher by 14% YoY). However, the PBIT margins were lower by 3% on account of higher input costs such as those of salt and power. Going forward, caustic soda prices are expected to come under pressure owing to lower international prices and imports, which will impact realisations and in turn margins. In the current fiscal, the production would be halted from June 2009 till onset of monsoon owing to water shortage problem, which will negatively impact the company’s performance.

  • The sale of the sponge iron business is expected to be completed during the current quarter as the petitions filed by the company with regards to the deal have been sanctioned by the high court of Madhya Pradesh. During FY09, the segment reported a 6% YoY growth in revenues primarily on account of higher realisations (up 41% YoY) as lower growth in volumes continue to weigh heavy on the overall performance of the company. The production and sales volumes were lower by 25% YoY and 24% YoY respectively on account of lower demand from the end user industries like steel that had announced production cuts. While realisations were higher for the full year, during 4QFY09 they have declined by nearly 14% YoY owing to global recession and its adverse impact on steel industry. PBIT margins contracted by 3.4% during the FY09 as compared to the same period last year on account of high production costs.

What to expect?
Considering the fact that the company is the only player in the VSF business domestically and the outlook of VSF and the cement sector from a long-term point of view remains positive, we believe that these two divisions will continue to be the growth drivers for the company. However, in the near to medium term, softening of prices of both the commodities would arrest the overall growth of the company.

The stock currently trades at Rs 2,262, implying a price to earnings (P/E) multiple of 14.3 times our FY11 estimated standalone earnings. At the topline level the company has outperformed our estimates. But talking about profitability, the company has ended the year almost in line with our expectations. Considering the asset valuation method, which we apply to value the diversified major on a sum of the parts basis we maintain our view on the stock and shall soon update our research report on the company.

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