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Grasim: Falling fibre prices dent margins - Views on News from Equitymaster
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Grasim: Falling fibre prices dent margins
May 21, 2015

Grasim Industries has announced its financial results for the quarter ended March 2015. During the quarter, while the company's standalone sales increased by 11.3% YoY, net profit declined by 76.2% YoY. Here is our analysis of the results:

Performance summary
  • Standalone revenues increase by 11.3% YoY during 4QFY15 driven by strong volume growth in the VSF and chemical segment.
  • Operating profits decline by 29.4% YoY; operating margins contract from 9% in 4QFY14 to 5.7% in 4QFY15.
  • Company reports exceptional loss of Rs 262 million.
  • Net profits decline by 76.2% YoY during the quarter. Net profit margins decline from 8.5% in 4QFY14 to 1.8% in 4QFY15.
  • During the full financial year 2014-15, while sales increased by 12.9% YoY, net profits declined by 40.9% YoY.

Standalone Financial Performance
(Rs m) 4QFY14 4QFY15 Change FY14 FY15 Change
Net sales 15,284 17,016 11.3% 55,386 62,523 12.9%
Expenditure 13,902 16,040 15.4% 48,057 57,520 19.7%
Operating profit (EBITDA) 1,382 976 -29.4% 7,329 5,004 -31.7%
EBITDA margin 9.0% 5.7%   13.2% 8.0%  
Other income 835 823 -1.4% 4,497 4,283 -4.8%
Depreciation 635 843 32.8% 1,561 1,782 14.2%
Interest 109 131 20.0% 415 393 -5.3%
Profit before tax & exceptional items 1,472 825 -44.0% 9,850 7,112 -27.8%
Exceptional gain/ (loss) - (262) NA - (262) NA
Profit before tax 1,472 562   9,850 6,849  
Tax 169 252 49.0% 890 1,550 74.2%
Effective tax rate 11.5% 30.6%   9.0% 21.8%  
Profit after tax 1,303 310 -76.2% 8,960 5,299 -40.9%
Net margin 8.5% 1.8%   16.2% 8.5%  
No of shares (m)       91.8 91.9  
Diluted EPS (Rs)*         57.7  
P/E (times)*         62.4  
*trailing twelve month earnings

What has driven performance in 4QFY15?
  • Grasim's standalone topline witnessed a moderate rise of 11.3% YoY during the quarter ended March 2015. Viscose Staple Fibre (VSF) sales volumes were higher by 19% YoY at 118,486 metric tonnes during the quarter as compared to 99,385 metric tonnes during the corresponding quarter of the previous financial year. However, the rise in the topline could not match the volume growth due 7% YoY decline in VSF realisations. VSF prices continued to slide lower on account of excess global VSF capacity and falling prices of competing fibres such as cotton and PSF. The chemical business reported 27.3% YoY increase in sales. Sales volumes grew by 21% YoY to 105,012 metric tonnes in 4QFY15.

  • During the quarter, operating profits declined by 29.4% YoY owing to lower VSF realizations. Operating profit margins contracted from 9% in 4QFY14 to 5.7% in 4QFY15.

  • The Company holds 40% stake in Birla Lao Pulp and Plantations Company Ltd (BLPP), a joint venture of the Company to secure pulp requirement for its VSF business at a cost of Rs 912.4 million. Owing to the overcapacity in both pulp and fibre businesses, its strategic importance to the company had diminished. As a result, the company has provided Rs 262.4 million (being the excess of the cost over the estimated enterprise value) towards diminution in the value of the investment which has been disclosed as an exceptional loss during the quarter.

  • The effective tax rate was also significantly higher on a YoY basis. Tax expenses during the quarter included a one-time charge of Rs 84 million on brought forward balance of deferred tax liability on account of increase in rate of surcharge on income tax as per the Finance Bill, 2015.

  • Owing to the poor operating performance during the quarter, the exceptional loss and significant jump in effective tax rate, the company's standalone net profits witnessed a decline of 76.2% YoY. Net profit margins contracted from 8.5% in 4QFY14 to 1.8% in 4QFY15.
What to expect?
Excessive global VSF capacities and subdued VSF prices have been a cause of concern for Grasim's profitability. It is worth noting that VSF prices tend to be linked to the price movements of other competing fibres. Polyester Staple Fibre (PSF) prices have declined on account of falling crude prices. On a quarter-on-quarter (QoQ) basis PSF prices have declined by 15% YoY. While cotton prices have remained range bound on a QoQ basis, they have fallen 27% YoY on account of record inventory and change in China's cotton policy.

During the financial year 2014-15, the company incurred a capex of about Rs 5.1 bn. With the commissioning of new capacities, the total VSF capacity stands increased to 498,225 metric tonnes per annum. Currently, a total capital expenditure of Rs 12.4 bn is under implementation for the standalone business.

In February, the company announced that Aditya Birla Chemicals (India) Ltd, an Aditya Birla Group company, was set to be merged with Grasim Industries. Grasim's board of directors has approved the proposed merger. The swap ratio approved by the board is 1 share of Rs 10 each of Grasim for every 16 shares of Rs.10 each of Aditya Birla Chemicals. Grasim will issue 14.62 lakh new shares, which will increase its share capital to Rs.933.1 crore. ABCIL is one of the leading chlor-alkali companies in India with three manufacturing plants located at Jharkhand), Uttar Pradesh and Karnataka with an installed capacity of about 293,000 tonnes of caustic soda per annum and 110 MW of captive power plant.

For the financial year ended March 2015, the board has approved a dividend of Rs 18 per share.

At the current price level, the stock is trading at 62.4 times its trailing twelve month standalone earnings. We maintain our HOLD view on the stock.

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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