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Grasim: High input costs hit margins - Views on News from Equitymaster

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Grasim: High input costs hit margins
Jul 27, 2012

Grasim Industries has announced its financial results for the quarter ended June 2012. The company has reported a rise of 21% YoY in standalone sales and a decline of 13% YoY in net profits during the period. Here is our analysis of the results.

Performance summary
  • Standalone revenues rise by 21% YoY during 1QFY13 on account of healthy growth in VSF sales volume.
  • Operating margins decline from 34.5% in 1QFY12 to 23.8% in 1QFY13 on account of high input costs.
  • At the bottomline level, net profits decrease by 13% YoY on account of poor show at the operating level.
  • Net margins decline from 30.7% in 1QFY12 to 22% in 1QFY12.

Standalone Financial Performance
(Rs m) 1QFY12 1QFY13 Change
Net sales 10,237 12,390 21.0%
Expenditure 6,707 9,438 40.7%
Operating profit (EBITDA) 3,529 2,953 -16.3%
EBITDA margin 34.5% 23.8%  
Other income 1,010 844 -16.4%
Depreciation 351 360 2.6%
Interest 106 61 -42.5%
Profit before tax/(loss) 4,082 3,376 -17.3%
Tax 941 647 -31.3%
Profit after tax/(loss) 3,141 2,729 -13.1%
Net margin 30.7% 22.0%  
No of shares (m) 91.7 91.7  
Diluted EPS (Rs)*   123.8  
P/E (times)*   21.8  

What has driven performance in 1QFY13?
  • Grasim's standalone topline witnessed a rise of 21% YoY during the quarter ended June 2012. The growth was mainly on account of 40% YoY rise in viscose staple fibre (VSF) sales volumes. The volume sales during the quarter stood at 77,013 metric tonnes (mt) against 54,839 mt in the corresponding quarter of the previous financial year. It is important to note that the company's VSF plant at Nagda was shut down for 27 days in 1QFY12 due to water shortage. This had affected production and consequently sales during that period. On the other hand, there was no plant shut down in 1QFY13 which resulted in higher volumes relative to 1QFY12. However, the volumes in the latest quarter were lower than the immediately preceding quarter ended March 2012 (4QFY12) when the company reported sales volumes of 94,904 mt.

  • The rise in the topline during 1QFY13 was moderated due to 16% YoY drop in realisations. It must be noted that prices of all fibres including VSF were at their peak during the corresponding quarter of the previous financial year (1QFY12) due to shortage of cotton.

  • While VSF realisations were lower during the quarter, operating costs were significantly higher on account of the rupee depreciation. The cost of raw materials and power & fuel surged by about 9.9% and 0.9% (as a percentage of net sales), respectively. Owing to this, operating margins contracted from 34.5% in 1QFY12 to 23.8% in 1QFY13.

  • Other income declined by 16.4% YoY during the quarter. Interest expenses declined by 42.5% YoY on account of interest subsidy from state government of Rajasthan.

  • Net profits dropped by 13.1% YoY during 1QFY13. Net profit margins declined from 30.7% in 1QFY12 to 22% in 1QFY13.

  • The VSF (156,000 TPA) and chemical (182,500 TPA) expansion projects are on track. The expansion in Harihar, Karnataka will go on stream in two phases in the second quarter (2QFY13) and the fourth quarter (4QFY13) during the current financial year 2012-13. Projects at Vilayat, Gujarat are scheduled for commissioning towards the end of the ongoing financial year.

What to expect?
The instability in the Eurozone and the overall slowdown in the Indian economy are likely to affect VSF demand in the medium term. On the other hand, the cotton crop in the current season would be a major determinant for VSF prices. The deficiency in the rainfall could push up cotton prices and, in turn, prop up VSF realisations.

The company's plant at Nagda was shut down for 11 days in July 2012 on account of water shortage. This is likely to affect volumes in the ongoing quarter. The company has constructed an additional reservoir to deal with the water shortage. Grasim plans to incur capex of Rs 83 bn for its standalone business during the current financial year. Of this, Rs 15.42 bn has been already expended in 1QFY13.

Despite 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. At the current prices of Rs 2,700 the stock is trading at 21.8 times its trailing twelve month standalone earnings. We maintain our "Buy" view on the stock from a 2-year perspective.

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