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Grasim: VSF surprises

Jul 25, 2002

Grasim, the diversified major, has announced a 3% increase in net profits on the back of a 2% rise in total revenues on a YoY basis. The company's cement division managed a 9% increase in dispatches on a YoY basis. The company has improved its operating margins by 190 basis points in the quarter ended June '02.

(Rs m)1QFY021QFY03Change
Net Sales 11,172 11,355 -4.1%
Other Income 145 93 -36.1%
Expenditure 8,840 8,901 -6.4%
Operating Profit (EBDIT) 2,332 2,455 5.3%
Operating Profit Margin (%)19.7%21.6%
Interest 475 442 -7.0%
Depreciation 626 624 -0.3%
Profit before Tax1,3761,4817.7%
Extraordinary items (24) (17)
Tax (330) (410)24.2%
Profit after Tax/(Loss) 1,022 1,055 3.2%
Net profit margin (%)8.6%9.3%
No. of Shares 72.3 72.3
Diluted Earnings per share*56.558.4
P/E Ratio 5.6
(* annualised)

On the operational front the company has managed to maintain its operating expenses inspite of large volumes in both cement and VSF by cutting down on raw material, staff and other expenses. The company has seen a major decrease in raw material costs, this may have been the result of better procurement practises resulting from higher utilisation. The company could also have benefitted due to its alliance with L&T in which it acquired 13% stake. Both companies have a huge procurement order size and could have benefitted from low prices due to bulk purchases.

The company has reported a 5% growth in its operating profits due to improved operational efficiencies. The higher efficiency has resulted in reduced working capital, which has declined by over Rs 1 bn. The interest expenses have gone down by 7% in the June quarter on a YoY basis. The extraordinary item is the expenses incurred by the company on account of the VRS scheme initiated in order to rationalise the workforce across all the divisions of the company.

The VSF division of the company has reported excellent performance withe sales volumes increasing by 48%, completely offsetting the 8% fall in realisations on a YoY basis. The exports initiatives of the company have paid off, as exports of the company have doubled in 1QFY03 while the total turover of the division has gone up by 35%.This is inspite of the fact that of its fibre plant at Nagda had been suspended for 27 days on account of water shortage. Grasim's cement division has reported growth of 9% in cement dispatches. Though the dispatches have gone up the realisations have been under pressure and this may have been the reason for a flat growth in the topline. The chemical business has shown improved production which has led to a 21% increase in its turnover. The sponge iron business has continued to show poor results reporting a 21% fall in turnover.

The stock is currently trading at Rs 326 on a P/E multiple of 6x FY03 annaulised earnings. The company has benefitted immensly from the restructuring exercise, which has helped pare down costs on all fronts. Due to its diversified businessess the company has been able to hedge itself against low cement realisations which have adversly affected cement majors like ACC. The VSF business has been the star performer this quarter and it looks as if the present momentum in the division is likely to continue going forward. The VSF business cycle seems to be on an upturn, as demand is rising. The VSF business has contributed 54% to the operating profits of the company compared to just 28% in the previous year. This shows a definite upturn in the business.

Cement has been identified as the growth driver for the company and the good dispatch figures indicate agressive initiatives to increase market share across the country. The company's alliance with L&T is likely to give Grasim further benefits on the operational front. Grasim could emerge as the largest player in the cement industry, as and when L&T divests the cement business. Being the third largest cement producer in the country, Grasim is in a good position to meet demand from the various regions in the country.

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