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Grasim: All round growth - Views on News from Equitymaster
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Grasim: All round growth
May 20, 2010

Grasim Industries announced its FY10 results. The company has reported a 15% YoY and nearly 66% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • For the sake of comparison, we have taken results without considering the demerger of the cement business.
  • Standalone revenues grow by 15% YoY during FY10 led by growth across its core businesses i.e. cement and VSF.
  • Operating profits grow by a robust 52% YoY during the year as costs grow at a slower pace as compared to sales.
  • Strong performance at the operating level, higher other income and extraordinary income leads to the 66% YoY growth in net profits.
  • Results are not strictly comparable with the corresponding period of last year owing to the sale of the sponge iron business in FY09.
  • The board of the company has recommended a dividend of Rs 30 per share.
  • The company’s subsidiary - UltraTech reports a 10.4% YoY and 11.9% YoY growth in sales and net profits respectively.


Financial performance snapshot
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales 28,955 33,702 16.4% 108,287 124,627 15.1%
Expenditure 22,168 24,671 11.3% 83,347 86,707 4.0%
Operating profit (EBITDA) 6,787 9,031 33.1% 24,940 37,921 52.0%
EBITDA margin 23.4% 26.8%   23.0% 30.4%  
Other income 739 1,329 80.0% 3,505 4,253 21.4%
Interest 372 590 58.7% 1,397 2,075 48.5%
Depreciation 1,253 1,490 18.9% 4,570 5,643 23.5%
Profit before tax/(loss) 5,900 8,280 40.3% 22,478 34,456 53.3%
Extraordinary Item - -   - 3,361  
Tax 2,053 2,250 9.6% 5,999 10,420 73.7%
Net profit 3,847 6,030 56.7% 16,480 27,397 66.2%
Net margin 13.3% 17.9%   15.2% 22.0%  
No of shares (m)       91.7 91.7  
Diluted EPS (Rs)*         298.8  
P/E (times)         8.4  
*trailing twelve month earnings

What has driven performance in FY10?
  • Grasim's core businesses include VSF and cement. However, the company has demerged its cement business w. e. f. from 1st October, 2009. The move is in line with the company’s plans to create a separate platform for its core activities - cement and VSF businesses. It has transferred its cement assets to a wholly owned subsidiary - Samruddhi Cement, which would be later merged with UltraTech. For the sake of comparison we have taken results without considering the demerger of the cement business.

  • Grasim has reported 15% YoY growth in revenues led by growth across its offerings. The VSF segment has reported 41% YoY growth in revenues on the back of higher volumes and realisations. The sales volumes were higher by 29% YoY and average realisations were higher by 10% YoY. During the same period last year, global economic downturn had impacted the company's business. Owing to higher economies of scale and improved realisations the segment witnessed expansion in margins. The segmental operating expanded 16.6% to 36.6% in FY10. The cement segment reported 18% YoY growth in volumes, while realisations were up by 3% YoY. On the other hand chemical segment witnessed 11% YoY growth in volumes and 16% YoY fall in average realisations. The chemical segment performance proved to be a drag on the overall results of the company. Thus, the company’s performance has been driven by VSF and cement business.

  • As costs grew at a slower pace compared to growth in revenues, operating profits reported 52% YoY growth in profits. Lower input costs have led to margin expansion. At the net level the company has reported 66%Yoy growth in profits. This has come in on the back of good show at the operating level, higher other income and on account of extraordinary gain (profit on transfer of Sponge iron business).

What to expect?
Owing to the demerger move, Grasim's standalone balance sheet would not include cement assets FY11 onwards. VSF remains Grasim' mainstay business and the company has planned to scale up the assets of this business by 80,000 tonnes at an investment outlay of Rs 10 bn over the next three years. Over the medium term, the demand is likely to sustain at current levels, however margins may come under pressure on account of an upward trend in pulp and sulphur prices. As far as sulphur business is concerned, prices are expected to remain under pressure due to commissioning of new capacities and cheap imports.

Grasim has outperformed our estimates for FY10 topline and bottomline growth by 14.5% and 9.5% respectively. This is because VSF business has done far better than our expectations. The stock currently trades at Rs 2,515, implying a price to earnings (P/E) multiple of 34.9 times our FY12 estimated standalone earnings.

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