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Grasim: High raw material costs impact profits
Jun 9, 2014

Grasim Industries has announced its March 2014 quarter results. The company has reported consolidated topline growth of 11% YoY while a loss has been reported at the net profit level.

Performance summary
  • Topline for the quarter grows 11% YoY, driven by 47% growth in the chemicals segment of the company
  • Operating margins suffer a decline to the tune of 6.5%, pulling the operating profits down 32% YoY
  • Bottomline falls further and suffers a decline of 65% YoY as lower other income and higher depreciation charges hurt. PBT, which excludes the impact of extraordinary items, falls 46% YoY
  • Profits for the full year fall 27% YoY on the back of a 7% growth in topline

Standalone Financial Snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Net sales 13,962 15,489 10.9% 52,550 56,035 6.6%
Expenditure 11,624 13,902 19.6% 41,668 47,422 13.8%
Operating profit (EBDITA) 2,338 1,587 -32.2% 10,882 8,613 -20.8%
EBDITA margin (%) 16.7% 10.2%   20.7% 15.4%  
Other income 984 630 -36.0% 4,346 3,848 -11.5%
Interest (net) 145 109 -24.9% 391 415 6.2%
Depreciation 451 635 40.8% 1,592 2,196 37.9%
Profit before tax 2,726 1,472 -46.0% 13,245 9,850 -25.6%
Extraordinary items 2,044  -   2,044 -  
Tax 1,046 169 -83.8% 3,029 890 -70.6%
Profit after tax/(loss) 3,724 1,303 -65.0% 12,260 8,960 -26.9%
Net profit margin (%) 26.7% 8.4%   23.3% 16.0%  
No. of shares (m) 91.8 91.8   91.8 91.8  
Diluted earnings per share (Rs)*         97.6  
Price to earnings ratio (x)*         34.0  
(* on trailing twelve months earnings)

What has driven performance in 4QFY14?
  • VSF, the key segment of the company and from where the company derived nearly 80% of its revenues, witnessed a 5% fall in revenues during the quarter gone by. Here, while the volumes came in higher by 4% YoY, the demand supply imbalance and liquidity crunch in China impacted VSF prices in the global markets.

  • The chemicals business did well though as it grew 47% YoY led by 30% growth in sales volumes. The full benefits from the new plant however will start accruing to the company current fiscal onwards.

    Cost break-up...
    (Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
    Cost of materials consumed 7,340 9,067 23.5% 25,829 29,867 15.6%
    % sales 52.6% 58.5%   49.2% 53.3%  
    Purchase of stock in trade - 27   49 68 39.6%
    % sales 0.0% 0.2%   0.1% 0.1%  
    Employee benefits 946 820 -13.4% 3,718 3,788 1.9%
    % sales 6.8% 5.3%   7.1% 6.8%  
    Power and fuel 1,718 2,168 26.2% 7,143 8,146 14.0%
    % sales 12.3% 14.0%   13.6% 14.5%  
    Freight and forwarding 258 281 8.8% 830 943 13.7%
    % sales 1.8% 1.8%   1.6% 1.7%  
    Others 1,361 1,541 13.2% 4,100 4,610 12.4%
    % sales 9.7% 9.9%   7.8% 8.2%  

  • On the operating profit front, they came in lower by 32% YoY during the quarter. This was mainly due to the cost of raw materials coming in much higher on a percentage of sales basis. One of the reasons for this could be the rupee depreciation that put pressure on pulp costs, one of the key raw materials for the company.

  • PBT fell further as it dropped 46% on the back of a huge 41% jump in depreciation charges. Further, with there being no extraordinary income this quarter as opposed to the corresponding quarter, bottomline came in lower by 65% during the quarter.
What to expect?
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. The long term outlook for VSF continues to be favourable in comparison to other fibres. The margins are however likely to remain under pressure in the near term due to overcapacity in China.

On the company's expansion plans, the company's greenfield project at Vilayat commenced for line I in April 2014 and will be followed by line II very shortly. These two lines have a capacity of 77k Tonnes Per Annum out of total capacity of 120k to be commissioned.

At the current prices of Rs 3,616 the stock is trading at 37 times its trailing twelve month standalone earnings. Given the overall slowdown in the domestic and global economy as well as the overcapacity situation in VSF, we reiterate our 'Hold' view on the stock from a 2-3 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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